Legislature(2007 - 2008)BARNES 124

05/11/2007 01:00 PM House RESOURCES


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01:43:19 PM Start
01:43:54 PM Presentation: Spencer Hosie, Rick Harper, Don Shepler, Ken Minesinger, Scott Hobbs, and W.h. Sparger: Building and Financing Gas Pipelines
04:54:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentations by Spencer Hosie, Rick TELECONFERENCED
Harper, Don Shepler, Ken Minesinger,
Scott Hobbs, and W. H. Sparger:
Building and Financing Gas Pipelines
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                          May 11, 2007                                                                                          
                           1:43 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Carl Gatto, Co-Chair                                                                                             
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Craig Johnson, Co-Chair                                                                                          
Representative Vic Kohring                                                                                                      
Representative Bob Roses                                                                                                        
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Mark Neuman                                                                                                      
Representative Berta Gardner                                                                                                    
Representative Bob Buch                                                                                                         
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION:  SPENCER HOSIE, RICK HARPER, DON SHEPLER, KEN                                                                     
MINESINGER, SCOTT HOBBS, AND W.H. SPARGER:  BUILDING AND                                                                        
FINANCING GAS PIPELINES                                                                                                         
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to report                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
SPENCER HOSIE, Attorney at Law                                                                                                  
Hosie McArthur LLP                                                                                                              
San Francisco, CA                                                                                                               
                                                                                                                                
KEN MINESINGER, Attorney at Law                                                                                                 
Greenberg and Traurig LLP                                                                                                       
Washington, D.C.                                                                                                                
                                                                                                                                
BILL SPARGER, Consultant                                                                                                        
Energy Project Consultants, LLC                                                                                                 
Colorado Springs, CO                                                                                                            
                                                                                                                                
DON SHEPLER, Attorney at Law                                                                                                    
Greenberg and Traurig LLP                                                                                                       
Washington, D.C.                                                                                                                
                                                                                                                                
SCOTT HOBBS, Consultant                                                                                                         
Energy Capital Advisors                                                                                                         
                                                                                                                                
RICK HARPER, Consultant                                                                                                         
Econ One Research, Inc.                                                                                                         
Los Angeles, CA                                                                                                                 
                                                                                                                                
ANTONY SCOTT, Commercial Section                                                                                                
Central Office                                                                                                                  
Division of Oil & Gas                                                                                                           
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  CARL   GATTO  called   the  House   Resources  Standing                                                             
Committee  meeting  to  order at  1:43:19  PM.    Representatives                                                             
Gatto, Seaton,  Guttenberg, and Edgmon  were present at  the call                                                               
to order.  Representatives Kohring,  Wilson, and Kawasaki arrived                                                               
as  the  meeting  was  in   progress.    Representatives  Neuman,                                                               
Gardner, and Buch were also present.                                                                                            
                                                                                                                                
^PRESENTATION:   SPENCER  HOSIE,  RICK HARPER,  DON SHEPLER,  KEN                                                             
MINESINGER,  SCOTT  HOBBS,  AND   W.H.  SPARGER:    BUILDING  AND                                                             
FINANCING GAS PIPELINES                                                                                                       
                                                                                                                                
1:43:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO apologized  for the late start of  the meeting and                                                               
thanked Gavel  to Gavel  for broadcasting the  meeting.   He then                                                               
asked Mr. Hosie to begin his presentation.                                                                                      
                                                                                                                                
1:44:43 PM                                                                                                                    
                                                                                                                                
SPENCER HOSIE,  Attorney at Law,  Hosie McArthur LLP,  a founding                                                               
partner of the San Francisco law  firm, told members he was asked                                                               
to speak about  the duty to develop under the  Alaska lease form.                                                               
He informed members  he has been a practicing oil  and gas lawyer                                                               
for almost  25 years.   He began his  law career working  for the                                                               
State of  Alaska in  the early  1980s on  the Amerada  Hess case.                                                               
Today, his firm runs a  national energy and intellectual property                                                               
practice.   His  firm  represents  a wide  range  of private  and                                                               
public  royalty owners.   He  has  been the  lead outside  energy                                                               
lawyer  for  the  State  of  Louisiana for  almost  a  decade  in                                                               
litigation and regulatory matters.   His firm has represented the                                                               
State of Hawaii,  and worked with the U.S.  Department of Justice                                                               
in  connection  with  federal   royalties  in  the  whistleblower                                                               
context.  His firm has deep experience in oil and gas matters.                                                                  
                                                                                                                                
1:46:18 PM                                                                                                                    
                                                                                                                                
MR.  HOSIE   said  he  has   personally  had  the   occasion  and                                                               
opportunity to review millions of  pages of oil company documents                                                               
over the  last two  decades.   He believes  he brings  a detailed                                                               
understanding  of how  oil companies  assess a  capital intensive                                                               
upstream  infrastructure  project:  what  matters,  what  doesn't                                                               
matter, what gets built, what doesn't get built and why.                                                                        
                                                                                                                                
1:46:59 PM                                                                                                                    
                                                                                                                                
MR. HOSIE presented the following information:                                                                                  
                                                                                                                                
     To understand the  duty to develop, it  is important to                                                                    
     understand the  nature of the relationship  that an oil                                                                    
     and gas lease creates  between the royalty owner, which                                                                    
     is the landowner  on the one hand, and  the oil company                                                                    
     on the  other hand  because it  is a  relationship very                                                                    
     unlike a typical commercial arms-length relationship.                                                                      
                                                                                                                                
     The  process starts  with the  landowner that  had land                                                                    
     that may  or may not  have mineral resources on  it but                                                                    
     the landowner  typically doesn't have the  expertise to                                                                    
     explore the  property, doesn't know how  to develop the                                                                    
     property, doesn't know how  to produce any hydrocarbons                                                                    
     found,  and  certainly  doesn't   know  how  to  market                                                                    
     hydrocarbons  for   the  best  possible  price.     The                                                                    
     landowner needs a  partner and that is,  of course, the                                                                    
     oil company.                                                                                                               
                                                                                                                                
     The  oil company  has exactly  the  suite of  expertise                                                                    
     that a  landowner needs.   Oil companies are  expert at                                                                    
     development,  at exploration,  at  marketing.   And  so                                                                    
     what happens  is the two  get together and sign  a very                                                                    
     short contract called  a lease.  I mean short  - I mean                                                                    
     it is  two pages, two and  a half to three  pages long.                                                                    
     It's a very short  document given that the relationship                                                                    
     created can last 50, 70, 80 years.                                                                                         
                                                                                                                                
     Now  the  landowner  contributes the  real  estate  the                                                                    
     landowner owns.   That's what  the landowner  brings to                                                                    
     the  table.     For  their  part,   the  oil  companies                                                                    
     contribute their  expertise.   They promise to  get the                                                                    
     lease in the first instance,  to use their expertise to                                                                    
     explore  the  property,  to develop  the  property,  to                                                                    
     produce   the   hydrocarbons    and   to   market   the                                                                    
     hydrocarbons all  for the mutual benefit  of themselves                                                                    
     and,  importantly, the  landowner,  the royalty  owner.                                                                    
     That's how an oil and gas lease works.                                                                                     
                                                                                                                                
1:48:55 PM                                                                                                                    
                                                                                                                                
     In  return  for  promising  to  use  its  expertise  to                                                                    
     develop and  to market, the oil  company typically gets                                                                    
     the  lion's  share of  the  value  of production.    In                                                                    
     Alaska,  under the  largely prevalent  lease form,  the                                                                    
     oil companies get  a full 87.5 percent of  the value of                                                                    
     production.  The state's royalty  share is 12.5 percent                                                                    
     and that,  given modern standards,  is very low  but it                                                                    
     was  the norm  back  when the  state's  lease form  was                                                                    
     drafted in the late 1950s.                                                                                                 
                                                                                                                                
     But, in return  for the lion's share of  the value, the                                                                    
     oil  company has  the obligation  to explore,  develop,                                                                    
     produce,  and market  diligently  all  with the  mutual                                                                    
     interests  of both  the oil  company  and landowner  in                                                                    
     mind.   It  is  a relationship  which  the courts  have                                                                    
     characterized for  many, many decades as  one of mutual                                                                    
     interdependence.   The precise  phrase the  courts use;                                                                    
     it's a relationship of mutual  benefit.  They are in it                                                                    
     together and that means that  the oil company, after it                                                                    
     signs on  the dotted  line on the  lease, is  no longer                                                                    
     free to  use its  unilateral economic self  interest to                                                                    
     make decisions.  It's no  longer free to say what makes                                                                    
     us the most money and act accordingly.                                                                                     
                                                                                                                                
     To  the  contrary,  in  making  development  decisions,                                                                    
     production decisions,  it has to take  into account the                                                                    
     interests of  its partner in this  venture, the royalty                                                                    
     owner, the  landowner, so it's  no longer  a commercial                                                                    
     relationship  where one  party  acts  according to  its                                                                    
     economic  self interest  alone.    That's a  critically                                                                    
     important thing about the  royalty relationship that is                                                                    
     really quite unique to that  relationship and very much                                                                    
     unlike a typical commercial relationship.                                                                                  
                                                                                                                                
1:50:47 PM                                                                                                                    
                                                                                                                                
MR. HOSIE continued:                                                                                                            
                                                                                                                                
     Now, oftentimes  the economic interests of  the royalty                                                                    
     owner and the  oil companies are aligned  but, every so                                                                    
     often,  there comes  a  situation  where the  interests                                                                    
     diverge, where they depart.   One common place where we                                                                    
     see  a  diversion  comes with  development  or  further                                                                    
     development  and  here's  why.     A  landowner  almost                                                                    
     invariably wants the property  developed.  A landowner,                                                                    
     royalty  owner, only  gets paid  when the  hydrocarbons                                                                    
     are  produced, severed,  and sold.    That's the  event                                                                    
     that  generates  the  royalty payment  to  the  royalty                                                                    
     owner so  they want the  product developed so  they can                                                                    
     get paid.   Of  course that's why  they've gone  to the                                                                    
     oil  company  in  the first  instance  -  produce  this                                                                    
     property for us.                                                                                                           
                                                                                                                                
     On the other  hand, you could have a  situation where a                                                                    
     given  oil company,  for any  number of  reasons, might                                                                    
     prefer not  to develop a  given property, at  least not                                                                    
     right  now.   They  might  be  long in  the  particular                                                                    
     resource, e.g.  long in  gas in the  West Coast  in the                                                                    
     Lower 48.   They might  be short  of cash.   They might                                                                    
     have sufficient cash but prefer  to spend those dollars                                                                    
     somewhere  else,  on  projects  abroad  where  the  oil                                                                    
     company perceives  that if it doesn't  move development                                                                    
     forward,  it will  lose the  opportunity.   The company                                                                    
     may have  what's known as  a very high  internal hurdle                                                                    
     rate, which is  a return on investment  [ROI] rate that                                                                    
     must be exceeded to green  light a development project.                                                                    
     For  example,  Exxon's  return on  investment  for  its                                                                    
     upstream activity  in 2005  was 46  percent.   It's ROI                                                                    
     across the  company in 2006  was 33 percent.   That's a                                                                    
     very high return on investment  and so there could well                                                                    
     be  a situation  where a  company says  you know  what?                                                                    
     This  might  be  an  economic   project  but  it's  not                                                                    
     economic for us  because we want all projects  to be at                                                                    
     a 30  percent plus return before  we go forward.   Or a                                                                    
     company  might simply  be spending  its money  in other                                                                    
     ways.                                                                                                                      
                                                                                                                                
1:52:51 PM                                                                                                                    
                                                                                                                                
     Another case  in point  - in the  last two  years Exxon                                                                    
     spent $41  billion buying  back its  stock on  the open                                                                    
     market - that's $41 billion in  two years.  It did that                                                                    
     to keep  its stock price  high and to keep  Wall Street                                                                    
     happy.   And I'm not  saying that that's  an irrational                                                                    
     thing  for  Exxon  to do.    From  Exxon's  perspective                                                                    
     alone,  that  was probably  a  great  idea because  its                                                                    
     stock price is high and Wall Street is happy.                                                                              
                                                                                                                                
     Those are important  goals for Exxon but  the key point                                                                    
     is this.   Once Exxon was in a  lease relationship with                                                                    
     the  State of  Alaska,  one going  back  30 years,  one                                                                    
     under which Exxon and the  other producers on the North                                                                    
     Slope have  made gargantuan profits from  production to                                                                    
     date, Exxon  can no longer make  decisions based solely                                                                    
     on  its own  economic self  interest.   That's not  the                                                                    
     proper approach.                                                                                                           
                                                                                                                                
     And so  there's this  inherent conflict  in development                                                                    
     circumstances.   The landowner  says listen,  we really                                                                    
     want you  to develop  because that's  how we  get paid.                                                                    
     The oil company  says well you know it's  really not in                                                                    
     our interest, at least not  right now.  We've got other                                                                    
     things we'd prefer to do.                                                                                                  
                                                                                                                                
1:53:59 PM                                                                                                                    
                                                                                                                                
MR. HOSIE continued:                                                                                                            
                                                                                                                                
     That  conflict  is  solved  by   the  implied  duty  to                                                                    
     develop.  The implied duty  to develop can be expressed                                                                    
     very simply,  in plain  terms.  An  oil company  has an                                                                    
     obligation  to  go  forward with  a  given  development                                                                    
     project  if  that  project  is,   on  its  own  merits,                                                                    
     reasonably economic -  full stop - period.   That's the                                                                    
     duty.  If  a given project is  reasonably economic, the                                                                    
     oil  company has  an obligation  to go  forward.   Why?                                                                    
     Because that's the  deal it made to get the  lease.  It                                                                    
     said I  will use my  expertise to develop this  for you                                                                    
     diligently and, in  return, I want the  lion's share of                                                                    
     the value of production.  That was the deal going in.                                                                      
                                                                                                                                
     And  so,  if  a  given project  is  economic,  the  oil                                                                    
     company  has  an  obligation to  its  partner  in  this                                                                    
     venture, the royalty owner, to go forward.                                                                                 
                                                                                                                                
1:55:05 PM                                                                                                                    
                                                                                                                                
     One analogy  I have  used that I  find helpful  in this                                                                    
     area relates to  the following.  Assume  that Toyota is                                                                    
     thinking about putting a  new manufacturing facility in                                                                    
     one of  five or  six Southern states  in the  Lower 48.                                                                    
     It  goes to  the five  or six  states and  says listen,                                                                    
     we're ready  to spend  our development dollars.   We're                                                                    
     going to  build a  manufacturing factory.   We're going                                                                    
     to  give jobs.   We're  going  to help  your tax  base.                                                                    
     This is  great for you but,  tell us, what will  you do                                                                    
     for  us?   That  will  start,  essentially, an  auction                                                                    
     between the various  states to see which  state can put                                                                    
     together the most attractive  development deal with tax                                                                    
     incentives, real estate rebates,  and job promises, and                                                                    
     educational benefits, and the like.                                                                                        
                                                                                                                                
     At  the end  of the  day let's  say that  Kentucky wins                                                                    
     that contest  and Toyota  agrees to  put that  plant in                                                                    
     Kentucky.  Let's also say  that Kentucky does something                                                                    
     that's pretty  shrewd.   It says as  part of  the first                                                                    
     deal, listen  Toyota, this  is all  great, this  is all                                                                    
     well  and   good,  but  if   this  first   facility  is                                                                    
     profitable and there comes a  time when you're thinking                                                                    
     about putting  a second factory  in, you have  to build                                                                    
     it in Kentucky.                                                                                                            
                                                                                                                                
     That is  exactly the situation  the State of  Alaska is                                                                    
     in  with  its leases.    They  made the  obligation  to                                                                    
     develop diligently  for the mutual benefit  of both the                                                                    
     State of Alaska and the  oil companies when they signed                                                                    
     the leases  so many years  ago.  Under  that obligation                                                                    
     they  don't  get to  come  to  the  state now  and  say                                                                    
     listen, we  can get a  higher rate of  return elsewhere                                                                    
     on our  money.   Or, there might  be a  more profitable                                                                    
     project  in  Kazakhstan  or Qatar.    Or,  we'd  really                                                                    
     prefer to spend our money  buying our stock back.  Tell                                                                    
     us,  make it  worth our  while.   That is  absolutely a                                                                    
     breach  of the  obligation under  the lease  form these                                                                    
     companies have done extremely well by.                                                                                     
                                                                                                                                
     That's the duty to develop.  Now the question arises: well,                                                                
     all well and good, Mr. Hosie, but is that duty present in                                                                  
     Alaska law and the deal on lease forms?                                                                                    
                                                                                                                                
1:57:13 PM                                                                                                                    
                                                                                                                                
     I can  tell you  yes, unequivocally and  absolutely, it                                                                    
     is.  And when was the  last time you heard a lawyer say                                                                    
     something about  absolutely?  It is  absolutely present                                                                    
     and here's why.                                                                                                            
                                                                                                                                
     First,  paragraph 19  of the  lease itself  talks about                                                                    
     further  development  and  specifically says  that  the                                                                    
     producer  oil company  has  to have  due  regard and  I                                                                    
     quote, "due  regard for the  interests of the  state in                                                                    
     making additional drilling  and development decisions."                                                                    
     That's the language of mutual benefit.                                                                                     
                                                                                                                                
     Second,  this question  has  already  been resolved  in                                                                    
     this state.  In what was  then known as the ANS royalty                                                                    
     litigation  in 1989,  then Judge,  now Justice,  Walter                                                                    
     Carpeneti issued  a decision looking at  the lease form                                                                    
     and which duties  were in that document  and which not.                                                                    
     In  that  decision,  which was  fully  binding  on  the                                                                    
     parties, the  state and the oil  companies alike, Judge                                                                    
     Carpeneti  said that  the lease  form contained  a full                                                                    
     array of duties including  the implied duty to develop.                                                                    
     There simply  can be  no question but  that there  is a                                                                    
     duty to develop under the  Alaska lease form and Alaska                                                                    
     law generally.                                                                                                             
                                                                                                                                
     And  so,  the  question  arises, given  that  the  duty                                                                    
     exists here, what constitutes a  breach?  What can't an                                                                    
     oil  company  do?   When  would  conduct qualify  as  a                                                                    
     breach of the implied duty to develop?                                                                                     
                                                                                                                                
1:58:59 PM                                                                                                                    
                                                                                                                                
     Well, if an oil company  looks at a particular project,                                                                    
     be it  the Pt. Thomson  Unit or  a gas line  in Alaska,                                                                    
     and if the  oil company concludes that  that project is                                                                    
     on its  own terms  reasonably economic  but nonetheless                                                                    
     refuses to go forward, that  is a breach of the implied                                                                    
     duty  - full  stop  -  period.   If  the oil  companies                                                                    
     refuse  to  do  that  economic  analysis,  but  instead                                                                    
     refuse to invest because they  have an overall national                                                                    
     or  perhaps international  policy  of  not spending  on                                                                    
     capital  enhancements for  the following  year or  five                                                                    
     years, that would  be a breach because they  have to at                                                                    
     least  run  the  numbers  and  check  to  see  if  it's                                                                    
     economic.                                                                                                                  
                                                                                                                                
     If an oil  company refuses to go forward but  then if a                                                                    
     third party comes and says,  listen we will build it if                                                                    
     you'll sell  us your production at  a reasonable market                                                                    
     price, if  that happens  and the  oil company  says no,                                                                    
     we're not going  to build it but you know  what?  We're                                                                    
     not going  to sell it  to you  either, that would  be a                                                                    
     breach  of the  implied duty.   Why  is that?   Because                                                                    
     effectively they're  just bottling  the resource  up in                                                                    
     the  ground.   The  courts  call  that speculative  in-                                                                    
     ground warehousing.   They're warehousing  the resource                                                                    
     and that violates every tenet  of the oil and gas lease                                                                    
     because it may be in  their best interest but it surely                                                                    
     is not in the royalty owner's best interest.                                                                               
                                                                                                                                
     And so,  there are cases  going back 40 years  that say                                                                    
     listen,  if they  are  in-ground  warehousing, that  is                                                                    
     inappropriate.   It's a  violation of  the lease.   You                                                                    
     can't  just bottle  it  up and  if  they've done  that,                                                                    
     that's improper.                                                                                                           
                                                                                                                                
2:00:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO noted  Exxon does  not  have a  pipeline in  some                                                               
situations in  which to ship resources  so, for 20 years,  it has                                                               
been recycling the  gas.  He asked at what  point the state could                                                               
say Exxon is no longer satisfying its duty in that case.                                                                        
                                                                                                                                
2:00:57 PM                                                                                                                    
                                                                                                                                
MR. HOSIE explained when the  state concludes that a gas pipeline                                                               
is reasonably  economic, it has the  right to make Exxon  and the                                                               
other producers  choose to  either build it  or let  the resource                                                               
go.   He said  the remedy  has to  be considered.   If  the state                                                               
assumes it has  a breach, has a  lot of gas stranded  and wants a                                                               
gas  pipeline  but the  company  will  not build  it,  litigation                                                               
should not be  the first option for remedy as  it rarely provides                                                               
a happy  outcome.  Fortunately,  a royalty owner has  a different                                                               
remedy in the breach of implied duty context.                                                                                   
                                                                                                                                
2:02:01 PM                                                                                                                    
                                                                                                                                
MR. HOSIE continued:                                                                                                            
                                                                                                                                
     That remedy is that the  oil company must surrender the                                                                    
     resource back if it says  a project is not economic and                                                                    
     it will not  go forward.  He pointed  out the discovery                                                                    
     wells  were  drilled in  Point  Thomson  30 years  ago.                                                                    
     Point Thomson has  not produced a drop of  oil or cubic                                                                    
     foot of gas.   Instead, 30 years of  studies have taken                                                                    
     place.     The  oil  companies  have   told  the  state                                                                    
     repeatedly that  Point Thomson  is not  an economically                                                                    
     feasible  project  and  have  said  they  will  not  go                                                                    
     forward  with a  gas line  until the  state compromises                                                                    
     its economic position to improve their economics.                                                                          
                                                                                                                                
     In my  understanding, that's what  they've said  to the                                                                    
     state repeatedly.  I've seen  language like that in the                                                                    
     Point Thomson plans of development  - the annual plans.                                                                    
     In that  situation they  have said  they are  not going                                                                    
     forward and  they cannot say that,  yet [they] continue                                                                    
     to hold the  resource indefinitely.  Why  not?  Because                                                                    
     they are just bottling it  up in the ground and they're                                                                    
     speculating with the gas and  warehousing it until, for                                                                    
     their  own  reasons,  they think  the  time  is  right.                                                                    
     Maybe  that's five  years, maybe  it's 10  years, maybe                                                                    
     it's 20 years.  Maybe  it's after they burn through the                                                                    
     900 trillion  feet of gas  they're producing  in Qatar.                                                                    
     I don't  know when they are  willing to do it  but what                                                                    
     we do  know is that they  sure aren't willing to  do it                                                                    
     today.                                                                                                                     
                                                                                                                                
2:03:43 PM                                                                                                                    
                                                                                                                                
MR. HOSIE continued:                                                                                                            
                                                                                                                                
     I  read  an op  Ed  piece  by Representative  Doogan  a                                                                    
     couple  of  weeks  ago.    He said  you  don't  have  a                                                                    
     pipeline  because  Exxon doesn't  want  you  to have  a                                                                    
     pipeline and I think that's exactly right.                                                                                 
                                                                                                                                
     So  the remedy  isn't  to charge  off into  litigation.                                                                    
     It's  not  your  job  to compel  them  to  honor  their                                                                    
     obligations and  build a  pipeline and,  honestly, does                                                                    
     the state want  an unwilling partner in  a project like                                                                    
     this?   No.   Just make  them choose.   If  they really                                                                    
     don't  think  it's  economic, they  have  to  give  the                                                                    
     resource  back.   And  then  you can  go  to other  oil                                                                    
     companies  that perhaps  have a  greater  need for  gas                                                                    
     today  as against  10  years  from now  or  may have  a                                                                    
     greater  need for  reserves, e.g.  Shell.   Shell would                                                                    
     love  to have  a deeper  reserve base  - e.g.  Chevron.                                                                    
     Chevron  is working  hard and  spending money  all over                                                                    
     the  world   to  increase  its  reserves.     Different                                                                    
     companies  have   different  positions   and  different                                                                    
     needs.   The  royalty owner  has the  right to  get the                                                                    
     resource back if the first  set of producers won't move                                                                    
     forward on  it and see  if you can't get  another group                                                                    
     of  producers  to  commit  to   build  the  project  in                                                                    
     concrete and specific terms.                                                                                               
                                                                                                                                
2:05:01 PM                                                                                                                    
                                                                                                                                
     Now what do  we know about North  Slope development and                                                                    
     the duty?   As I said, we know that  the producers have                                                                    
     said that  right now it's  not economic to  go forward.                                                                    
     That's   been,  as   I   understand   it,  the   entire                                                                    
     justification to  ask the state  to give  some economic                                                                    
     concessions.   Help  us  make it  economic.   It's  not                                                                    
     economic without help.                                                                                                     
                                                                                                                                
     Well,  two things  on that.   First,  if that  is true,                                                                    
     they have to give the  resource back and second, I know                                                                    
     at  least that  that's  not what  Exxon really  thinks.                                                                    
     And here's how I know.                                                                                                     
                                                                                                                                
     There  are detailed  accounting  standards that  govern                                                                    
     how an  oil and  gas company  reports reserves  for its                                                                    
     SEC  filing  purposes  -  SEC  is  the  Securities  and                                                                    
     Exchange Commission - for  annual reports and quarterly                                                                    
     reports.     They   are  called   financial  accounting                                                                    
     standards  and  they are  promulgated  by  the FASB  or                                                                    
     Financial  and Accounting  Standards Board.   Financial                                                                    
     Accounting  Standard  19  governs how  an  oil  company                                                                    
     accounts for  exploratory drilling costs  on properties                                                                    
     that are  not yet proven  and not in production.   That                                                                    
     accounting standard changed on April  4, 2005.  The new                                                                    
     standard  said   the  following.    Oil   company,  you                                                                    
     continue to  capitalize, that is  carry on  your books,                                                                    
     these  expenses but  only if  you  have no  substantial                                                                    
     doubt that the project  is economically viable and two,                                                                    
     economically  viable under  today's  market prices  and                                                                    
     with today's technology.                                                                                                   
                                                                                                                                
     Let me  say that  again because it's  important.   I am                                                                    
     specifically  quoting  paragraph  31(a) of  FASB  19-1,                                                                    
     promulgated  April   4,  2005,  "An  oil   company  can                                                                    
     continue to ...capitalize development  costs only if it                                                                    
     has no  substantial doubt that the  project is economic                                                                    
     and  (b) economic  based on  today's market  prices and                                                                    
     technologies."                                                                                                             
                                                                                                                                
2:07:28 PM                                                                                                                    
                                                                                                                                
MR. HOSIE continued:                                                                                                            
                                                                                                                                
     Exxon reviewed that new accounting  standard in May and                                                                    
     June of  2005, and  on July 1,  2005, reported  that it                                                                    
     had decided that  Point Thomson was not  a project with                                                                    
     substantial doubt  as to  its economic  viability based                                                                    
     on 2005 technology and market  prices.  There is a one-                                                                    
     line footnote in  their 10K for 2005  that says they've                                                                    
     adopted new  accounting and  when you  look at  the new                                                                    
     accounting,  that's  what you  see  they  have to  have                                                                    
     done.                                                                                                                      
                                                                                                                                
     So  this  was  not  a   decision  made  lightly.    SEC                                                                    
     reporting  for  oil  companies,  especially  given  the                                                                    
     Shell  debacle of  some years  ago,  is something  they                                                                    
     take very seriously  and are careful about.   So, Exxon                                                                    
     will have looked at the  economics, it will have talked                                                                    
     to  its outside  auditors,  Price  Waterhouse Cooper  -                                                                    
     PWC.   There  will be  paper going  back and  forth and                                                                    
     Exxon   would  have   determined   and  convinced   its                                                                    
     auditors,  who had  to  sign off  on  this, that  Point                                                                    
     Thomson was not a  project with substantial doubt about                                                                    
     its economic ability.                                                                                                      
                                                                                                                                
     That is  inconsistent with what  Exxon was  telling the                                                                    
     state right  there and then  and even this  past couple                                                                    
     of months.   I've  read testimony where  Exxon officers                                                                    
     have  said,  you know,  this  project  is not  economic                                                                    
     without help from  the state.  If  they really believed                                                                    
     that  was  true, they  could  not  have taken  the  SEC                                                                    
     accounting they  took.  They  did not - forgive  me for                                                                    
     being  blunt -  they did  not  mislead the  SEC.   They                                                                    
     truly  think it's  economic but  what  they were  doing                                                                    
     with the state was negotiating.   These are people that                                                                    
     negotiate  for a  living.   It was  a negotiation.   It                                                                    
     wasn't  actually  accurate  when  they  said  it's  not                                                                    
     economic.  It was just a negotiating position.                                                                             
                                                                                                                                
     And   so  it's   really   important   that  the   state                                                                    
     understands that these are  negotiations and, you know?                                                                    
     Sometimes  they are  positions and  sometimes they  are                                                                    
     negotiating postures.   You have to be  careful to take                                                                    
     what you are told with a grain of salt.                                                                                    
                                                                                                                                
2:09:21 PM                                                                                                                    
                                                                                                                                
     And so,  I thought  that was a  significant discrepancy                                                                    
     between what  Exxon was telling  the state and  what it                                                                    
     was  telling the  SEC, the  investing  public and  Wall                                                                    
     Street.                                                                                                                    
                                                                                                                                
2:09:34 PM                                                                                                                    
                                                                                                                                
MR. HOSIE stated his final point, as follows:                                                                                   
                                                                                                                                
     It's easy to talk about  these oil companies as sort of                                                                    
     a shapeless, faceless, "they;"  some sort of monolithic                                                                    
     they.    They  are  not   that.    They  are  different                                                                    
     companies.   Exxon  behaves, thinks  and acts  one way.                                                                    
     Chevron  is  a very  different  oil  company.   It  has                                                                    
     different needs  and desires.   ConocoPhillips  is very                                                                    
     different too.   It's very important, I  think, for the                                                                    
     state to  understand that  even though  these companies                                                                    
     are terrifically  good at presenting a  unified face to                                                                    
     the   state,    internally   they   may    have   sharp                                                                    
     disagreements about  what is  proper, what is  not, and                                                                    
     what should  be done.   It's important in  dealing with                                                                    
     them to keep that in mind.                                                                                                 
                                                                                                                                
     Thank you.  That's all I  have but I would be delighted                                                                    
     to answer any questions,  Mr. Chairman [that] committee                                                                    
     members have.                                                                                                              
                                                                                                                                
2:10:22 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  announced the  members present:   Representatives                                                               
Guttenberg, Edgmon, Seaton, Gardner, Wilson, Kawasaki and Buch.                                                                 
                                                                                                                                
2:10:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE EDGMON asked if the  term "reasonably economic" is                                                               
well grounded in case law and federal law.                                                                                      
                                                                                                                                
MR.  HOSIE said  it  is.   He explained  that  to be  "reasonably                                                               
economic," it is not the state's  obligation to take all the risk                                                               
out of  the project.  The  oil companies accepted risk  when they                                                               
signed  the  lease and  that  is  one  reason they  receive  87.5                                                               
percent of the  value.  Regarding what  is reasonably profitable,                                                               
that is  a function of  investment rates  and rates of  return in                                                               
the industry  in general.   That  could be 8,  10 or  12 percent.                                                               
However, it is not  25, 35, or 40 percent.   If the oil companies                                                               
have a ROI [Rate of Investment]  hurdle that is that high and has                                                               
not green-lighted Alaska because  it is not screamingly economic,                                                               
that is  a violation of  the lease.  He  added that all  of these                                                               
companies have  written upstream  investment guidelines  that set                                                               
their investment  hurdle rates by  region and hydrocarbon.   They                                                               
will have a hurdle rate for  Point Thomson; he believes the state                                                               
is entitled  to see the hurdle  rates if an oil  company claims a                                                               
project is not economic.                                                                                                        
                                                                                                                                
2:12:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON asked  if Mr. Hosie said  the oil companies                                                               
were posturing  for the  purpose of negotiating.   She  said when                                                               
the state  set up its  "must haves" in Alaska  Gasline Inducement                                                               
Act  (AGIA),  the oil  companies  said  meeting those  conditions                                                               
would  be  impossible for  them  to  do  and claimed,  via  radio                                                               
commercials, the state was not  allowing them in.  She questioned                                                               
whether they cannot get in or do not want to get in.                                                                            
                                                                                                                                
MR. HOSIE  answered what they  said was  just another piece  of a                                                               
larger negotiation.   An  oil company  wants a  deal that  is the                                                               
most  economically beneficial  for  it.   He  said  he would  not                                                               
assume that they maintain the  position that the "must haves" are                                                               
deal  breakers for  them, but  he does  not assume  they will  be                                                               
excluded.   What  the Legislature  has  done is  sparked an  open                                                               
competitive process,  which is a good  thing.  If, at  the end of                                                               
the day, the  state forces the larger oil companies  to commit to                                                               
developing  or   relinquishing  the   leases,  he   believes  the                                                               
companies will not give the leases back.                                                                                        
                                                                                                                                
2:14:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BUCH   asked  the  name  of   the  state's  lease                                                               
agreement.                                                                                                                      
                                                                                                                                
MR. HOSIE  replied it is named  the DL-1 lease agreement;  DL for                                                               
Department of  Lands and 1 because  it was the first  lease draft                                                               
created in 1959 by a lawyer who worked for Chevron.                                                                             
                                                                                                                                
2:15:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BUCH  asked  for  the name  of  the  document  he                                                               
referred  to  earlier  dated  April 4,  2005,  regarding  an  oil                                                               
company's statement and position.                                                                                               
                                                                                                                                
MR. HOSIE said  he referred to several essential  documents.  The                                                               
first is  a 2005 10K  annual report.   It contains a  category in                                                               
the  financial   footnotes  for  suspended  well   costs  and  it                                                               
specifically refers  to Point Thomson.   In  it Exxon says  it is                                                               
not  expensing Point  Thomson costs;  it is  continuing to  carry                                                               
them  as a  capital  asset.   It then  cites  the new  accounting                                                               
standard,  FAS   19-1,  particularly   paragraph  31(a).     That                                                               
paragraph states what had to  be included to take that accounting                                                               
treatment.    FAS  19-1  was  a new  standard  that  says,  under                                                               
paragraph  31(a),  "no  substantial doubt";  about  the  economic                                                               
viability  of Point  Thomson.   If  [Exxon] told  the state  that                                                               
Point  Thomson was  not economic,  that accounting  treatment was                                                               
improper.  He  noted the inconsistency between  what [Exxon] told                                                               
the FCC and  what it told the  state is what he  wanted to impart                                                               
to the committee.  He stated:                                                                                                   
                                                                                                                                
     The final  point on  that, it's  less a  new accounting                                                                    
     for  them because  they  were  capitalizing all  along.                                                                    
     What was new was the  new accounting standard that made                                                                    
     them  ask and  answer  this  question; specifically  in                                                                    
     that  April, May,  June  2005 period.    That was  new.                                                                    
     They looked  at it.   They said we have  no substantial                                                                    
     doubt  about  economic  viability  and  they  took  the                                                                    
     requisite accounting benefit thereafter.                                                                                   
                                                                                                                                
     So  again, the  2005 annual  K  - the  10K, the  annual                                                                    
     report,  FAS  19-1,  and particularly  paragraph  31(a)                                                                    
     therein.                                                                                                                   
                                                                                                                                
2:17:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  said he could  imagine Exxon telling the  SEC the                                                               
project is  viable at a 12  percent profit but telling  the state                                                               
it is not  profitable below 33 percent and  both statements would                                                               
be accurate.                                                                                                                    
                                                                                                                                
MR. HOSIE said  they would be accurate had Exxon  conceded to the                                                               
state  that  the project  was  reasonably  profitable with  a  12                                                               
percent  return,  but would  not  go  forward without  the  state                                                               
taking action to increase the return  to 35 percent.  He felt the                                                               
negotiation would  have been different  had Exxon  conceded that.                                                               
Instead  Exxon  told  the  state   it  needed  help  because  the                                                               
economics were not viable.                                                                                                      
                                                                                                                                
2:18:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  if the  same filings  apply to  the                                                               
other participants  in Point Thomson  or whether they  just apply                                                               
to the operator.                                                                                                                
                                                                                                                                
MR. HOSIE  said BP and  Exxon took  the same accounting  in 2005.                                                               
However, very recently BP wrote  down its investment in the Point                                                               
Thomson  unit,  probably  as  a  result  of  the  unit  agreement                                                               
litigation.    ConocoPhillips didn't  call  it  out, most  likely                                                               
because  it  did  not  have  enough money  invested  to  make  it                                                               
pivotal.   He  thought Exxon  is  the largest  investor in  Point                                                               
Thomson.                                                                                                                        
                                                                                                                                
2:20:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked  if the landowner and Exxon  have an agreed-                                                               
upon understanding of the term "specific clarity."                                                                              
                                                                                                                                
MR. HOSIE  thought perhaps not.   Exxon has been famous  for high                                                               
grading  its investment.   It  wants to  drive its  ROI up  every                                                               
year.  Its ROI is currently twice  the average in the oil and gas                                                               
sector.   That is a  sound business strategy because  Wall Street                                                               
loves it  and Exxon's  stock price remains  strong.   Exxon spent                                                               
$41 billion buying  back its stock, which means that  money is no                                                               
longer available for  upstream development.  He  pointed out that                                                               
Exxon  could easily  decide to  not go  forward unless  a project                                                               
meets its own internal hurdle guideline.                                                                                        
                                                                                                                                
2:21:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER asked if  the state could request, through                                                               
discovery, documentation  of Exxon's internal hurdle  if the case                                                               
is in  court, or  whether a  better way  to get  that information                                                               
exists.                                                                                                                         
                                                                                                                                
MR. HOSIE  said the state would  certainly have the right  to see                                                               
the  documents in  court.   However the  state may  have subpoena                                                               
powers as part of  the process to move the gas  line forward.  He                                                               
believes if the state made such  a request, it would be difficult                                                               
for Exxon to  say it needs help economically but  cannot show the                                                               
state its own studies.  The  state and Exxon are in this together                                                               
and Exxon has obligations.                                                                                                      
                                                                                                                                
2:22:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER asked who should make the request.                                                                       
                                                                                                                                
MR.  HOSIE said  he believes  DNR,  and said  DNR should  request                                                               
copies  of   specific  documents   directly  from   senior  Exxon                                                               
officials.                                                                                                                      
                                                                                                                                
2:23:13 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  recalled   reading  [Exxon's  worldwide]  annual                                                               
report in which  the following caption caught  his attention: Our                                                               
Enormously  Profitable Alaska  Operation.   He  said he  suspects                                                               
that backing off  from an enormously profitable  operation is not                                                               
a good  idea.   As a result,  Exxon will wait.   Alaska's  gas is                                                               
enormously profitable,  in which case  Alaska is broke  but Exxon                                                               
is happy.                                                                                                                       
                                                                                                                                
MR. HOSIE  said he thought that  is exactly what Exxon  is doing:                                                               
waiting the state out.                                                                                                          
                                                                                                                                
2:24:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  thanked Mr. Hosie  for his testimony and  said he                                                               
clarified  the  topic of  the  "duty  to develop"  for  committee                                                               
members.  He asked Mr. Hosie to  send copies of the 10K report to                                                               
the committee electronically.                                                                                                   
                                                                                                                                
The committee took an at-ease from 2:24:46 PM to 2:30:07 PM.                                                                
                                                                                                                                
2:30:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked Mr. Minesinger to present to the committee.                                                                
                                                                                                                                
2:30:32 PM                                                                                                                    
                                                                                                                                
KEN  MINESINGER, Attorney  at Law,  Greenberg  Traurig LLP,  told                                                               
members he would address FERC  and antitrust issues, specifically                                                               
how  AGIA addresses  the competitive  problems associated  with a                                                               
producer-owned pipeline.  He stated the following:                                                                              
                                                                                                                                
     FERC  and antitrust  issues  are  critical to  understanding                                                               
     AGIA  and how  it  fixes  the core  problems  that would  be                                                               
     associated with  producer ownership of the  pipeline that we                                                               
     all hope to be built.                                                                                                      
                                                                                                                                
2:31:40 PM                                                                                                                    
                                                                                                                                
     Specifically,  and I  have a  slide  presentation ...  we're                                                               
     going  to  address four  competitive  issues.   First  we're                                                               
     going to look at the  competitive problems associated with a                                                               
     producer-owned  pipeline.   Second, we're  going to  look at                                                               
     how AGIA's  "must have" provisions work  toward fixing those                                                               
     problems.   Third, we're  going to  discuss why  those "must                                                               
     have"  provisions in  AGIA are  critically necessary  to fix                                                               
     those problems.   Finally, we're going to  briefly discuss a                                                               
     question  that   has  arisen,  the  question   being  if  an                                                               
     independent  pipeline happens  to win  the AGIA  license and                                                               
     holds  an  open  season, what  anti-trust  implications  are                                                               
     there, if  any, if the producers  don't show up to  the open                                                               
     season and don't bid for capacity on this pipeline.                                                                        
                                                                                                                                
2:32:34 PM                                                                                                                    
                                                                                                                                
     Before we go into those issues,  I'll just tell you a little                                                               
     bit   about  myself.     I've   represented  several   major                                                               
     interstate natural  gas pipelines  and other  clients before                                                               
     the FERC, including the largest  natural gas pipeline in the                                                               
     United States.  I've represented  these clients in FERC rate                                                               
     proceedings,    certificate   proceedings    involving   the                                                               
     construction of major pipelines, and  in some of the largest                                                               
     market power proceedings at FERC  in the last several years.                                                               
     I've also served as the  chairman of the Antitrust Committee                                                               
     of the Energy  Bar Association, and I've  worked on numerous                                                               
     antitrust matters involving natural  gas pipelines and other                                                               
     energy  companies  and  I  think bring  a  unique  FERC  and                                                               
     antitrust perspective to this issue.                                                                                       
                                                                                                                                
2:33:26 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER continued:                                                                                                       
                                                                                                                                
     Let's  first  talk about  the  competitive  problems with  a                                                               
     producer-owned  pipeline.    I  would just  say,  first,  we                                                               
     address  these issues  in  detail in  a  memorandum that  we                                                               
     prepared for LBA  - actually two memoranda: one  in 2005 and                                                               
     one,  the most  recent  one,  is December  21,  2006.   It's                                                               
     posted on the LBA website if  you want to read about this in                                                               
     even more detail.                                                                                                          
                                                                                                                                
     The main  competitive issue  that we  discussed in  the memo                                                               
     that  we wanted  to  talk  about today  is  one of  vertical                                                               
     market power.  A producer-owned  pipeline would own both the                                                               
     pipeline  and the  gas and,  as  a result  of that  vertical                                                               
     integration,  would  have  an  incentive  not  to  ship  gas                                                               
     produced by competing producers.   The analogy I like to use                                                               
     -  folks are  probably  tired of  hearing me  say  it, is  -                                                               
     imagine  you have  three railroads  and  there's one  bridge                                                               
     across  the Mississippi  River.   If  one  of the  competing                                                               
     railroads  buys the  bridge, whose  rail cars  will have  an                                                               
     incentive to  let across that  bridge first.  It's  going to                                                               
     have  a clear  incentive to  let  its trains  go across  and                                                               
     discriminate  against its  competitors.   That's what  we're                                                               
     dealing with here.                                                                                                         
                                                                                                                                
     The disincentive  that a producer-owned pipeline  would have                                                               
     could manifest  itself in several  ways.   First, expansion,                                                               
     as we'll see,  would have a disincentive to  expand the line                                                               
     to serve  its competing  producers.   There would  be access                                                               
     and discrimination  problems.  They would  have an incentive                                                               
     to find ways, sometimes  subtle, to discriminate against its                                                               
     rival producers.   It would also have an  incentive to delay                                                               
     the project, to  not move forward with the  project in order                                                               
     to perhaps avoid flooding the  market with not only its gas,                                                               
     but gas from its competitors.                                                                                              
                                                                                                                                
     And  finally,  the  vertical relationship  could  facilitate                                                               
     collusion between the three producers.   When I use the term                                                               
    producers today, I'm referring to Exxon, BP and Conoco.                                                                     
                                                                                                                                
2:35:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO announced the committee would take a break to                                                                    
address a technical problem.                                                                                                    
                                                                                                                                
The committee took an at-ease from 2:36:05 PM to 2:37:15 PM.                                                                
                                                                                                                                
2:37:15 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER continued his presentation, as follows:                                                                          
                                                                                                                                
     So let's talk  about the vertical market power  issue just a                                                               
     little more.   It's important  to recognize that  this isn't                                                               
     just theory.  This is  something that the U.S. Department of                                                               
     Justice, the Attorney General, in  1977, found to be a major                                                               
     issue.   In '77 the Attorney  General stated it would  be in                                                               
     the interest  of producer owners to  resist future expansion                                                               
     of this  pipeline and discourage  future entry  into Alaskan                                                               
     gas  production by  others.   Why?   Because the  producers'                                                               
     market power  could be reduced by  discovery and development                                                               
     of new fields by other producers in this state.                                                                            
                                                                                                                                
     The Attorney  General also stated a  producer-owned pipeline                                                               
     would  seek  to  restrict  access  and  throughput  to  take                                                               
     monopoly profits.   As a  result, in '77, the  Department of                                                               
     Justice recommended a complete  ban on producer ownership of                                                               
     this pipeline.                                                                                                             
                                                                                                                                
     Now,   several  years   later,  the   Reagan  Administration                                                               
     revisited  the issue.   And  while they  didn't recommend  a                                                               
     ban,  they issued  what is  sometimes  called a  conditional                                                               
     waiver.   Essentially  what they  said was  we might  permit                                                               
     producer ownership  but only if  the producers  can convince                                                               
     FERC that antitrust issues will not be a problem.                                                                          
                                                                                                                                
2:38:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER asked  if the  Department of  Justice ban                                                               
recommendation  applied  to  all  pipelines or  just  the  Alaska                                                               
pipeline.                                                                                                                       
                                                                                                                                
2:38:53 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER informed  members it applied to  an Alaska natural                                                               
gas pipeline to the Lower 48 states.                                                                                            
                                                                                                                                
CO-CHAIR GATTO  clarified it is  a monopoly pipeline,  which sets                                                               
it apart.                                                                                                                       
                                                                                                                                
MR. MINESINGER agreed the Alaska  natural gas pipeline represents                                                               
a very unique situation.                                                                                                        
                                                                                                                                
2:39:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  asked if  once  the  pipeline is  up  and                                                               
running,  the first  expansion usually  lowers the  tariff.   She                                                               
questioned whether that has any relative significance.                                                                          
                                                                                                                                
2:39:45 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER  said there  are a  variety of  ways in  which the                                                               
producer-owner could resist  the expansion of the line.   One way                                                               
is to simply delay.   The FERC process takes a  long time and the                                                               
uncertainty  about rates  and when  it will  be built  can really                                                               
impact an explorer that  is trying to bring its gas  on line.  He                                                               
add it  is important  to note  that the  FERC chairman  stated in                                                               
2005  that those  antitrust issues  are still  valid and  will be                                                               
addressed by FERC in any certificate proceeding.                                                                                
                                                                                                                                
2:41:10 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER said it is  also important to note that precedent,                                                               
both  at  FERC,  the  Federal Trade  Commission  (FTC),  and  the                                                               
Department  of  Justice  since   1977,  is  consistent  with  the                                                               
Attorney General's initial concern.  A  number of cases at all of                                                               
those  agencies involve  vertical market  power and  a series  of                                                               
FERC orders  seek to  address this  issue and  recognize it  is a                                                               
problem.    He noted  the  producers  cannot disagree  with  this                                                               
point.    When  [the  producers] participate  in  other  pipeline                                                               
proceedings, they  complain about  the same issue.   He  read the                                                               
following quote from a BP filing:                                                                                               
                                                                                                                                
     The  problem with  an affiliate  acquiring  capacity on  its                                                               
     affiliated  pipeline  is related  to  the  pipeline and  its                                                               
     affiliate in the aggregate accruing  the ability to exercise                                                               
     market power.   It relates to the combined  incentive of the                                                               
     affiliate and the pipeline to withhold capacity.                                                                           
                                                                                                                                
He explained  BP is  saying, in other  words, to  exercise market                                                               
power  by discriminating  against  competitors.   That  is not  a                                                               
point subject to any reasonable dispute.                                                                                        
                                                                                                                                
2:42:08 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER  noted that this  is an extreme  situation because                                                               
no  pipeline in  the  Lower  48 states  exists  that has  similar                                                               
vertical  market  power  issues  where such  a  small  number  of                                                               
producers  would  own the  pipeline.    He  pointed out  that  is                                                               
contrary to some  of the testimony he heard  while watching Gavel                                                               
to Gavel.  He said that testimony was simply incorrect.                                                                         
                                                                                                                                
2:42:53 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER continued his presentation:                                                                                      
                                                                                                                                
     Unlike  the  1977  DOJ  opinion,   AGIA  takes  a  different                                                               
     approach.     Let's  talk  about  how   AGIA  addresses  the                                                               
     competitive  problems that  would  be raised  by a  producer                                                               
     pipeline.   AGIA  does not  advocate a  ban.   AGIA takes  a                                                               
     middle ground  approach, similar to  the Reagan way  in that                                                               
     AGIA  invites applications  by all  parties, including  both                                                               
     producers  and independent  pipelines.   So, to  answer your                                                               
     question  Representative Wilson,  AGIA absolutely  seeks the                                                               
     producers  to submit  an application  and  includes them  in                                                               
     this process.   But instead  what AGIA does, it  attempts to                                                               
     fix the competitive  problems that would arise if  you had a                                                               
     producer-owned pipeline  and simply didn't have  these "must                                                               
     have" provisions that are in AGIA.                                                                                         
                                                                                                                                
     Let's go through those provisions  briefly.  Problem one, as                                                               
     we've  discussed,  there  would   be  an  incentive  by  the                                                               
     producers   not  to   expand   the  line   to  serve   their                                                               
     competitors.   AGIA  directly addresses  that.   It requires                                                               
     that the applicant commit to  expand this line in reasonable                                                               
     engineering increments and  on commercially reasonable terms                                                               
     that encourage  exploration and  development of  natural gas                                                               
     in this state.                                                                                                             
                                                                                                                                
2:44:20 PM                                                                                                                    
                                                                                                                                
     So AGIA directly speaks to  the, perhaps, prime issue of the                                                               
     competitive problem with  a producer owned line.   Note here                                                               
     that contrary to what prior  testimony has asserted, natural                                                               
     gas pipelines are not common carriers.   They are not.  They                                                               
     are  contract carriers  and  it's  an important  difference.                                                               
     Common  carriers  must,  like  oil  pipelines  at  least  in                                                               
     theory, must serve all comers.   If there's more demand than                                                               
     capacity,  they serve  all on  a pro  rata basis.   Everyone                                                               
     gets a piece of the pipeline.                                                                                              
                                                                                                                                
     Gas  pipelines however,  are contract  carriers.   What that                                                               
     means is if  new shippers come along and  want an expansion,                                                               
     the  only way  they can  get  capacity is  by expanding  the                                                               
     pipeline  or   by  obtaining  capacity  that   the  existing                                                               
     shippers perhaps don't want and  want to relinquish.  With a                                                               
     producer-owned  pipeline, the  producers would  have control                                                               
     over  both of  those avenues  of obtaining  capacity.   They                                                               
     could try and  resist expansion and they  certainly would be                                                               
     under  no  obligation to  release  their  capacity to  their                                                               
     competitors.                                                                                                               
                                                                                                                                
2:45:48 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER continued:                                                                                                       
                                                                                                                                
     Also  on the  expansion issue,  AGIA  - another  one of  its                                                               
     "must haves"  states that the  AGIA pipeline must  hold open                                                               
     seasons for expansion capacity every  two years to determine                                                               
     whether there  is interest  in expanding  the line.   Again,                                                               
     AGIA directly speaks to the expansion issue.                                                                               
                                                                                                                                
     Another problem related  to the expansion issue.   Suppose a                                                               
     producer pipeline says okay, we'll  expand but they'll do it                                                               
     only on terms that are owners'.                                                                                            
                                                                                                                                
2:46:13 PM                                                                                                                    
                                                                                                                                
     One of the key ways that  AGIA addresses that is through the                                                               
     rolled-in  rate   requirement.     Here  we're   assuming  a                                                               
     situation  where   the  expansion   would  cause   rates  to                                                               
     increase.   Were you  to have  incremental rates  that would                                                               
     cause  the explorers  to pay  significantly higher  rates in                                                               
     many  cases  than the  existing  shippers,  they'd be  at  a                                                               
     severe  competitive disadvantage.    AGIA,  again, tries  to                                                               
     strike  a   middle  ground   by  requiring   rolled-in  rate                                                               
     treatment of expansion costs up  to a 15 percent increase in                                                               
     the existing rates,  trying to reduce again  the barriers to                                                               
     entry, if you  will, faced by competitors.   These rolled-in                                                               
     rates are  consistent with  FERC policy  in Order  2005, and                                                               
     with the  federal law, [Alaska  Natural Gas Pipeline  Act of                                                               
     2004]  ANGPA,  that mandates  that  FERC  use rate  criteria                                                               
     which  promote exploration,  development, and  production of                                                               
     Alaska's gas.                                                                                                              
                                                                                                                                
2:47:29 PM                                                                                                                    
                                                                                                                                
     Another problem  we mentioned is discrimination  and access.                                                               
     In   this  case   a   producer-owned   pipeline  really   is                                                               
     indifferent  to having  high  transportation  rates for  the                                                               
     pipeline.  Why?  Because  they're just paying money from one                                                               
     pocket to  the other.  They  own the pipeline.   They really                                                               
     are indifferent to  how high the rate gets,  except - except                                                               
     that that rate, if they  can keep it high, adversely impacts                                                               
     their competitors.   It  acts as  a disincentive  to explore                                                               
     for  more gas.   AGIA  directly tries  to help  address that                                                               
     problem by requiring  certain things that tend  to lower the                                                               
     rates in  this pipeline  system, mandating  a 70/30  debt to                                                               
     equity ratio, for example, which  has a significant downward                                                               
     effect on rates,  as opposed [to] if you use  a thicker debt                                                               
     to equity  ratio.   And there are  other provisions  in AGIA                                                               
     regarding cost  overruns and  so forth,  which also  help in                                                               
     this area.                                                                                                                 
                                                                                                                                
2:48:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BUCH asked  if, on  the  current  oil pipeline  in                                                               
Alaska, the tariff is set  and maintained and gives the producers                                                               
the advantage of not only  creating higher competition with their                                                               
competitors, but  also reduces  at the  wellhead the  amount that                                                               
they pay the state.  He asked  if that is addressed and whether a                                                               
natural  gas pipeline  is different  in that  regard so  that the                                                               
state has a royalty accomplishment.                                                                                             
                                                                                                                                
2:49:22 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER said it is  addressed in that the provisions being                                                               
discussed, such as the 70/30 debt  to equity ratio, would tend to                                                               
drive the  tariff rate  down, which  would increase  the wellhead                                                               
price and the state's royalties.   It essentially gives the state                                                               
an  opportunity to  avoid  some of  the  problems experienced  in                                                               
connection with the TAPS oil pipeline.                                                                                          
                                                                                                                                
2:49:52 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER continued:                                                                                                       
                                                                                                                                
     One  other problem  would be  the  problem of  delay.   AGIA                                                               
     requires that the  AGIA pipeline hold an  open season within                                                               
     36 months  and it requires  the pipeline to also  do certain                                                               
     things by  a specific  date certain.   It must  initiate the                                                               
     FERC  prefiling process  and  file for  a  certificate by  a                                                               
     specific date  certain.  A  producer pipeline,  in addition,                                                               
     would be required to sanction  this project within one year.                                                               
     So,  AGIA  would not  permit  a  producer-owned pipeline  to                                                               
     simply sit back  and delay this year after  year after year.                                                               
     It  requires  a specific  timeframe  for  going forward,  as                                                               
     opposed  to  some  amorphous,   you  know,  vague,  optional                                                               
     promise of when they can go forward.                                                                                       
                                                                                                                                
2:50:48 PM                                                                                                                    
                                                                                                                                
     Let's  talk  briefly  about  why   these  "must  haves"  are                                                               
     critically  important, to  the  extent  we haven't  already.                                                               
     You know,  some have  suggested in  prior testimony  why not                                                               
     simply rely  on FERC regulation.   FERC regulates interstate                                                               
     pipelines.  Why isn't that  enough - some of the flexibility                                                               
     that we heard in the debate over this bill.                                                                                
                                                                                                                                
     I  guess it  gets  back to  something Mr.  Hosie  said in  a                                                               
     different context and, to quote  from President Reagan, it's                                                               
     a  matter of  trust but  verified.   The state  here has  an                                                               
     opportunity to provide an additional  line of defense.  FERC                                                               
     regulation exists,  sure, but why not  provide an additional                                                               
     line  of defense  against some  of  these clear  competitive                                                               
     problems?                                                                                                                  
                                                                                                                                
     TAPS - we've discussed that  example.  The state has already                                                               
     seen  what  can  happen  when   you  have  a  producer-owned                                                               
     pipeline that  lacks the incentives a  normal pipeline would                                                               
     have  to  increase throughput  through  the  line and  serve                                                               
     other shippers.   In TAPS,  that situation, there  have been                                                               
     numerous  complaints by  other producers  that they've  been                                                               
     discriminated  against  and  there  are  examples  of  other                                                               
     producers that have simply exited  the state because of what                                                               
     they  perceive as  just not  a fair  deal on  that pipeline.                                                               
     AGIA  gives  the state  a  chance  to avoid  repeating  that                                                               
     problem.                                                                                                                   
                                                                                                                                
     It's  also important  to  recognize the  FERC  process -  it                                                               
     exists,  yes, but  it can  be a  long, difficult  litigation                                                               
     that  you'd  be facing  for  a  producer  to try  and  force                                                               
     expansion of the  line or bring some  sort of discrimination                                                               
     claim or so  forth.  AGIA takes that uncertainty  out of the                                                               
     equation and  says look, producers  you have to  expand this                                                               
     pipeline and so forth.                                                                                                     
                                                                                                                                
     Producers, it's worth noting,  are currently appealing Order                                                               
     2005,  which is  FERC's regulation  involving this  project.                                                               
     They're  challenging the  regulations that  would facilitate                                                               
     the expansion  of this  pipeline so  there shouldn't  be any                                                               
     doubt  that if  you simply  rely on  FERC, you're  in for  a                                                               
     long, drawn out fight that AGIA would help to avoid.                                                                       
                                                                                                                                
2:53:18 PM                                                                                                                    
                                                                                                                                
     I would  also note, before  we move  to the next  slide that                                                               
     yes,  you have  all  sorts  of existing  laws  that seek  to                                                               
     prevent anti-competitive conduct.   FERC and the Natural Gas                                                               
     Act is  one example  but there  are others,  antitrust laws,                                                               
     for  example.    Simply  having those  laws  though  doesn't                                                               
     prevent necessarily  companies from  - they're going  to try                                                               
     and evade those  laws sometimes.  Just to  cite one example,                                                               
     one of  these producers  has been alleged  and one  of their                                                               
     key  employees  has admitted  to  trying  to manipulate  the                                                               
     entire  United  States'  propane   market.    Simply  having                                                               
     antitrust laws on the books  that provide for treble damages                                                               
     and criminal penalties  didn't prevent it.  And  so, why not                                                               
     try and  build in an extra  line of defense here  in AGIA by                                                               
     mandating some  of these  things that  are important  to the                                                               
     state's interests.                                                                                                         
                                                                                                                                
2:54:24 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER said the final issue he would touch on concerns                                                                  
what would happen if the producers do not bid in an open season.                                                                
He continued:                                                                                                                   
                                                                                                                                
     Assume  you've  got an  AGIA  licensed  pipeline.   It's  an                                                               
     independent line  and clearly the  producers, they  have the                                                               
     gas,  they have  the leases  currently.   But, what  if they                                                               
     just  don't   show  up  and  bid   for  firm  transportation                                                               
     capacity?   You have to  have firm commitments  generally to                                                               
     build a pipeline.                                                                                                          
                                                                                                                                
     I guess my answer to that  is it depends on how the question                                                               
     is  posed.   If  you  have an  agreement  between the  three                                                               
     producers not  to bid in  an open  season, you would  have a                                                               
     very serious antitrust  issue.  It would  raise very serious                                                               
    issues of collusion under Section 1 of the Sherman Act.                                                                     
                                                                                                                                
     That having  been said,  I think it's  premature to  go much                                                               
     further than that.  I think we  need to wait and see how the                                                               
     open  season plays  out, see  first how  the AGIA  licensing                                                               
     process plays out and then  evaluate the facts at that time.                                                               
     Then the state can determine  - other interested parties can                                                               
     determine  whether further  investigation is  warranted into                                                               
     whether there is any antitrust  issue in that scenario, FERC                                                               
     issue, or  perhaps some  other type of  issue that  would be                                                               
     raised by  effectively withholding  those gas  supplies from                                                               
     the market.                                                                                                                
                                                                                                                                
2:55:56 PM                                                                                                                    
                                                                                                                                
     In  closing, I'd  just  like  to say  AGIA  really charts  a                                                               
     middle  ground  here between  the  two  extremes of  banning                                                               
     producer ownership  in this pipeline, as  was recommended by                                                               
     the Attorney General in '77,  and then on the other extreme,                                                               
     simply negotiating a deal, in  private, exclusively with the                                                               
     three producers.                                                                                                           
                                                                                                                                
2:56:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said that sounds like a deal that was put                                                                        
together about one year ago.                                                                                                    
                                                                                                                                
MR. MINESINGER said it does sound familiar.  AGIA is right in                                                                   
the middle.  He explained:                                                                                                      
                                                                                                                                
     Instead of banning producer ownership,  AGIA attempts to fix                                                               
     the  competitive problems  associated with  a producer-owned                                                               
     line.   It invites the producers  into the process in  a way                                                               
     that is  consistent with the  state's interest  in promoting                                                               
     the maximum exploration and development  of the abundant gas                                                               
     resources in  this state.   It  establishes a  level playing                                                               
     field,   which  all   parties   involved   can  compete   to                                                               
     participate in this process.                                                                                               
                                                                                                                                
2:57:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BUCH said  in 1926,  Standard  Oil was  precluded                                                               
from  vertical integration  so  we  have come  full  circle.   He                                                               
continued:                                                                                                                      
                                                                                                                                
     The federal government - we  now in our pipeline through one                                                               
     of the  producers in particular -  I know going back  to the                                                               
     Midwest there's BP  gas stations everywhere.   So, they have                                                               
     the oil, they  have the pipeline, they  have the refineries,                                                               
     they have the gas stations.   It would seem to me that times                                                               
     change, laws  change.  We're  going to  have to get  FERC to                                                               
     change  one of  them in  particular to  make this  all work.                                                               
     I'm asking  you if there's  any possibility of  looking into                                                               
     your crystal ball to see if  we're going to run afoul of the                                                               
     federal government  somewhere down the road  with this again                                                               
     so  that this  whole  thing  just gets  mired  in a  federal                                                               
     court.                                                                                                                     
                                                                                                                                
2:58:16 PM                                                                                                                    
                                                                                                                                
MR.  MINESINGER asked  if Representative  Buch was  asking if  an                                                               
antitrust problem would exist if the producers own the pipeline.                                                                
                                                                                                                                
REPRESENTATIVE BUCH replied affirmatively.                                                                                      
                                                                                                                                
MR. MINESINGER  said that depends  because the antitrust  laws do                                                               
not  impose a  complete ban  on vertical  integration.   Vertical                                                               
integration  can  be pro-competitive  at  times.   However,  this                                                               
situation is extreme  where three producers would  own 95 percent                                                               
of the gas  and the pipeline.   The state needs to  wait and look                                                               
at  the facts  as  they develop  to see  whether  a FERC  problem                                                               
exists.  FERC is obligated  to ensure that jurisdictional natural                                                               
gas  and  electric  prices  remain  just  and  reasonable.    The                                                               
antitrust agencies  are tasked with preventing  and investigating                                                               
collusive  activity between  competitors and  preventing unlawful                                                               
monopolization.   He said  one cannot  just say  a producer-owned                                                               
pipeline would  violate the antitrust  laws, although  it clearly                                                               
raises serious, competitive  issues.  The concerns  raised by the                                                               
Attorney General  in 1977 are valid  today.  The question  is how                                                               
one  gets  at those  problems  -  through antitrust  proceedings,                                                               
FERC, or AGIA.                                                                                                                  
                                                                                                                                
3:00:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked how many  miles of pipelines  the producers                                                               
own in the Lower 48 states.                                                                                                     
                                                                                                                                
3:00:34 PM                                                                                                                    
                                                                                                                                
MR. MINESINGER  said virtually none  with small exceptions.   For                                                               
the most  part, the  pipelines are independently  owned.   A very                                                               
small  amount  of the  capacity  might  be  owned by  a  pipeline                                                               
affiliate in  a few cases  but those situations are  much smaller                                                               
than Alaska's pipeline.                                                                                                         
                                                                                                                                
3:01:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  thanked Mr. Minesinger  and asked Mr.  Sparger to                                                               
present to the committee.                                                                                                       
                                                                                                                                
3:01:52 PM                                                                                                                    
                                                                                                                                
BILL SPARGER, Consultant, Energy  Project Consultants, LLC, first                                                               
congratulated members and  said it's a great day for  Alaska.  He                                                               
told  members he  is a  consultant to  the Administration's  AGIA                                                               
team with 35  years of experience in  construction management and                                                               
project management with  two major Lower 48  natural gas pipeline                                                               
companies.  He  has worked on all aspects  of pipelines: onshore,                                                               
offshore, LNG,  compressor stations,  process plants,  et cetera.                                                               
He gave the following presentation:                                                                                             
                                                                                                                                
     Very,   very   briefly   from  a   terminology   standpoint,                                                               
     everything I talk about I'll  talk about the project meaning                                                               
     the  Southern Alaska  Canada route  following  TAPS and  the                                                               
     Alaska Highway  into Alberta, recognizing that  that may not                                                               
     be  the  project  that  goes forward  but  that's  what  I'm                                                               
     talking about.                                                                                                             
                                                                                                                                
     Like  Mr. Minesinger,  producers  to me  [are] the  existing                                                               
     three  North Slope  oil  producers.   North  America is  the                                                               
     United States  and Canada.   I  leave Mexico  out of  it for                                                               
     this discussion.                                                                                                           
                                                                                                                                
3:03:41 PM                                                                                                                    
                                                                                                                                
     I'm  here to  talk  about what  I  call unfounded  concerns.                                                               
     Over the last number of weeks  and months, you have heard in                                                               
     testimony  and  in  print statements  that  are  couched  as                                                               
     concerns  or  issues that  appear  to  me to  be  unfounded.                                                               
     We're going  to talk about  all four of  them so I  won't go                                                               
     through this list because you will see them one at a time.                                                                 
                                                                                                                                
3:04:09 PM                                                                                                                    
                                                                                                                                
     The  first  one of  these  unfounded  concerns is  that  the                                                               
     shippers bear  all of  the financial  risks of  project cost                                                               
     overruns.  That is simply not  true.  For the last decade in                                                               
     the  Lower  48,  virtually  all  pipelines,  the  agreements                                                               
     between  the shippers  and the  pipeline companies  are what                                                               
     [are]  called negotiated  rates.   Negotiated means  exactly                                                               
     what it  says.  The two  parties negotiate what the  rate is                                                               
     and they negotiate who bears  what risks and, quite frankly,                                                               
     in most  instances, the pipeline  bears 100 per cent  of the                                                               
     risk of cost overruns on the pipeline - in most cases.                                                                     
                                                                                                                                
     For  this project  I would  assume that  there will  be some                                                               
     risk sharing in this negotiated rate.   I don't know what it                                                               
     is.  It won't be 100 per  cent of the risk for the shippers,                                                               
     nor do  I believe it  will be 100 per  cent of the  risk for                                                               
     the pipeline company, but something somewhere in between.                                                                  
                                                                                                                                
     These negotiated risks then turn  into something - Mr. Hobbs                                                               
     will talk about some as firm transportation (FT).                                                                          
                                                                                                                                
3:05:33 PM                                                                                                                    
                                                                                                                                
MR. SPARGER continued:                                                                                                          
                                                                                                                                
     A  good  model, and  I'll  mention  this several  times,  is                                                               
     Rockies  Express.   It's a  new project.   It  will probably                                                               
     start  construction   next  month,   1400  miles,   42  inch                                                               
     multibillion dollar  project.   It is being  constructed and                                                               
     the majority  ownership is a  pipeline company in  the Lower                                                               
     48.  One of the  producers, Conoco, actually owns 25 percent                                                               
     of the  project but has  not executed  the project.   It's a                                                               
     minority ownership.   And then  they ship about  400 million                                                               
     cubic feet  a day.   One of  the other producers,  BP, ships                                                               
     about 200  million a day,  going up  to 300 as  this project                                                               
     expands  so they  know exactly  what  negotiated rates  are.                                                               
     They are in  a negotiated rate situation  in Rockies Express                                                               
     whereby the pipeline  bears 100 percent of  the cost overrun                                                               
     risk on the project.                                                                                                       
                                                                                                                                
3:06:37 PM                                                                                                                    
                                                                                                                                
     The  other unfounded  concern is  that  producers must  have                                                               
     economic certainty  and economic certainty breaks  down into                                                               
     three areas.   The  first is supply,  or the  upstream side.                                                               
     This is  as certain  as it gets.   The gas  is there.   They                                                               
     know  how  much  they  can produce.    They  understand  the                                                               
     reservoir, recognizing that it  may act slightly differently                                                               
     during  ... a  gas blow  down but,  for most  projects, when                                                               
     most  people  sign  up  for firm  transportation  on  a  new                                                               
     project, they  don't know that all  the gas is there.   They                                                               
     haven't drilled all the wells and  so they are taking a risk                                                               
     that they  might not find  the gas they think  they're going                                                               
     to find.  In this case, that risk is just simply not there.                                                                
                                                                                                                                
     The pipeline,  or midstream  risk -  we've talked  about the                                                               
     negotiated rate on  the previous issue and so  that is maybe                                                               
     a little risk but is certainly  not 100 percent borne by the                                                               
     producers or the  shippers.  And the  market downstream risk                                                               
     is  simply what  do you  get  for the  product.   That is  a                                                               
     normal  business risk  that all  producers take  for all  of                                                               
     their products everyday.  It's  the business they're in.  No                                                               
     one  guarantees them  what  they  are going  to  get in  the                                                               
     future.                                                                                                                    
                                                                                                                                
3:08:12 PM                                                                                                                    
                                                                                                                                
MR. SPARGER continued:                                                                                                          
                                                                                                                                
     The next  unfounded concern  is that  the producers  are the                                                               
     only  ones qualified  to  construct the  pipeline.   In  the                                                               
     Lower 48 and Canada, producers  do not normally construct or                                                               
     own  onshore natural  gas pipelines.   There  are, in  round                                                               
     numbers,  200  plus thousand  miles  of  pipelines in  North                                                               
     America  -  interstate  natural gas  transmission  lines  in                                                               
     North  America.    The  producers, if  they  own  any,  it's                                                               
     probably offshore  and it's a very  infinitesimal percentage                                                               
     of this 200,000 miles of pipe  in the ground.  You might ask                                                               
    yourself why don't they own it.  Why don't they own it?                                                                     
                                                                                                                                
     Well,  Mr. Hosie  talked about  the rates  of return  or the                                                               
     hurdle rates that they want  to see.  Pipelines simply don't                                                               
     earn  those  kinds  of  rates   and  the  rates  are  highly                                                               
     regulated, which  is not the  business that they want  to be                                                               
     in, hence, pipeline  companies who are in  that business own                                                               
     and construct these pipelines.                                                                                             
                                                                                                                                
     Because they  own and construct  all the pipelines,  they do                                                               
     it everyday  for a living  in North America;  companies like                                                               
     Kinder Morgan,  companies like TransCanada,  and I  can name                                                               
     many more.   I'm just using them as examples.   They do this                                                               
     day in  and day  out in  North America for  a living.   They                                                               
     understand   the   regulations.      They   understand   the                                                               
     construction techniques.   They  understand the  climate for                                                               
     purchasing materials and equipment.   They simply understand                                                               
     how to execute these projects.                                                                                             
                                                                                                                                
3:09:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked whether El Paso is a pipeline builder.                                                                     
                                                                                                                                
MR. SPARGER said El Paso Energy Corporation builds pipelines.                                                                   
                                                                                                                                
3:09:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON asked  if pipeline  companies, since  they                                                               
usually take the most risk,  absorb any overruns and whether that                                                               
is adjusted in the tariff rates.                                                                                                
                                                                                                                                
3:10:29 PM                                                                                                                    
                                                                                                                                
MR.  SPARGER  explained in  a  negotiated  rate situation,  if  a                                                               
pipeline company overruns the project  cost, it earns less on the                                                               
money it  invested.  The  negotiated rate does  not automatically                                                               
increase  because costs  increased, unless  that is  part of  the                                                               
negotiated terms.                                                                                                               
                                                                                                                                
3:11:04 PM                                                                                                                    
                                                                                                                                
DON  SHEPLER,  Attorney  at  Law,  Greenberg  Traurig  LLP,  told                                                               
members he  is working with  the Governor's AGIA team  and brings                                                               
FERC experience.  He said Mr.  Sparger was spot on in his answer.                                                               
He clarified the distinction comes  down to recourse rates versus                                                               
negotiated rates.   If one assumes,  at the end of  the day, that                                                               
most,  if not  all,  of the  capacity on  this  pipeline will  be                                                               
contracted for  under negotiated rates,  the best example  is the                                                               
Rockies  Express.    The  pipeline  committed  to  a  fixed  rate                                                               
contract,  he believes  at  $1.10 for  end-to-end  service.   The                                                               
recourse rate  was higher but  would go  up or down  depending on                                                               
the cost  of the project.   The  anchor shippers in  that project                                                               
signed negotiated rate  contracts.  Therefore, if  it cost Kinder                                                               
Morgan two  times more  than it expected  to build  the pipeline,                                                               
the  recourse rate  will  probably increase  but  the fixed  rate                                                               
contracts will remain the same.                                                                                                 
                                                                                                                                
3:13:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER said in discussions  of who might build an                                                               
Alaska pipeline  or come to the  table with an offer,  there have                                                               
been a  limited number  of parties but  many other  companies are                                                               
out there.   She asked  if Alaska would  have a larger  number of                                                               
interested builders, except for AGIA.                                                                                           
                                                                                                                                
3:13:37 PM                                                                                                                    
                                                                                                                                
MR.  SPARGER said  that is  possible or  a company  might partner                                                               
with  another  company  with  more  history in  Alaska.    It  is                                                               
difficult for  a company  with no  knowledge to  catch up  with a                                                               
company  with   years  of  knowledge,   like  the   producers  or                                                               
MidAmerica.    However,  nothing  will prohibit  a  company  from                                                               
stepping forward.                                                                                                               
                                                                                                                                
3:14:19 PM                                                                                                                    
                                                                                                                                
MR. SPARGER continued with his presentation, as follows:                                                                        
                                                                                                                                
     I'm  not trying  to  say  here that  the  producers are  not                                                               
     capable of building this pipeline  because they are capable.                                                               
     They  build  pipelines  all  over the  rest  of  the  world,                                                               
     primarily  in places  like Africa  and the  Middle East  and                                                               
     Indonesia.  They just don't happen  to do that as a business                                                               
     in North America.                                                                                                          
                                                                                                                                
3:14:42 PM                                                                                                                    
                                                                                                                                
     The  other   unfounded  concern   is  that   schedules  with                                                               
     milestone dates drive up the  project cost - in other words,                                                               
     almost a  quote that  "firm dates  are bad."   I've  heard -                                                               
     seen - heard  it in testimony.  I've actually  heard some of                                                               
     you express  that concern.   Once again, this is  simply not                                                               
     true.     Realistic  schedules  are  a   project  necessity.                                                               
     Projects  without  schedules  tend to  go  on  indefinitely,                                                               
     forever.   Schedules can and  are adjusted  as circumstances                                                               
     change.   When  the circumstances  change so  that it  looks                                                               
     like  your cost  is starting  to  go up,  if you  hold to  a                                                               
     certain  schedule date,  then the  company is  going to  sit                                                               
     back, step back  just a little bit and say,  what am I going                                                               
     to make  - what am  I going to earn  if I make  the schedule                                                               
     date versus  what additional is it  going to cost me.   They                                                               
     are going to  look at economic decisions based  on the total                                                               
     impact  to the  business.   Sometimes  the  decision is  I'm                                                               
     going to hold the firm date.   I'm going to let the costs go                                                               
     up because the  profits, when I get this in  service, are so                                                               
     big that I  can afford a little cost overrun.   On the other                                                               
     hand,  sometimes the  schedule dates  are simply  moved back                                                               
     some to try  to keep the costs  more in line.   But the fact                                                               
     that you have those dates does  not, in and of itself, drive                                                               
     the   cost   up   unnecessarily   without   other   economic                                                               
     justification.                                                                                                             
                                                                                                                                
3:16:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON said  last year  when the  Legislature was                                                               
reviewing the contract before it,  experts that talked about cost                                                               
overruns were  brought in.   They  said they  researched projects                                                               
around the  world to  find out  why some  failed and  others were                                                               
successful.   They  cautioned legislators  to  avoid fixed  dates                                                               
because most  of the  failed projects  failed because  they could                                                               
not meet a deadline.                                                                                                            
                                                                                                                                
3:17:34 PM                                                                                                                    
                                                                                                                                
MR. SPARGER  said he  reviewed that information,  as well  as the                                                               
material  from an  IPA  course  that state  staff  attended.   He                                                               
believes  no project  management  expert would  say  do not  have                                                               
dates.   He  emphasized that  unrealistic and  unachievable dates                                                               
should not  be set.   He  said some of  the projects  the experts                                                               
looked at were not in North  America and not executed by pipeline                                                               
companies and, more importantly, no  one knows how the dates were                                                               
set to  start with.  As  an engineer, he is  aware that sometimes                                                               
dates are set  by a company's management and those  dates are not                                                               
realistic.  If the company is  not convinced that it should begin                                                               
with realistic  dates, problems can  ensue.  He repeated  that he                                                               
does not  believe the  experts were  advising the  Legislature to                                                               
start  off  with no  dates  because  the  project will  never  be                                                               
finished.                                                                                                                       
                                                                                                                                
3:19:33 PM                                                                                                                    
                                                                                                                                
MR. SPARGER continued his presentation:                                                                                         
                                                                                                                                
     Some other  unfounded concerns  and issues  - and  I'll very                                                               
     briefly go  through these and I  can expand if you  want to.                                                               
     One  of  the  statements   is  leading  edge  technology  is                                                               
     required to produce project costs  and I think it's just the                                                               
     opposite,  leading   edge  being  technology  that   is  not                                                               
     commercially  available  -  X   100  or  100,000  PSI  yield                                                               
     strength pipe is not commercially available.                                                                               
                                                                                                                                
     You want  to use  the best  technology that  is commercially                                                               
     available but when you start  getting off into leading edge,                                                               
     you  expose  yourself actually  to  costs  and overruns  and                                                               
     project delays.   If it's  not commercially  available, that                                                               
     just simply means nobody has  done it before on a production                                                               
     basis.   They may have  done it in the  lab.  They  may have                                                               
     done it on small scale things  but they haven't done it on a                                                               
     production basis.  So, I would argue with that.                                                                            
                                                                                                                                
     The  other thing  that  keeps  coming up  in  a  lot of  the                                                               
     discussions is  mega projects  are different.   That  may be                                                               
     true  for  certain mega  projects,  like  the Panama  Canal,                                                               
     things  like that.    In  my opinion,  it  is  not true  for                                                               
     pipelines.  A  pipeline is obviously a linear  project.  You                                                               
     design  and build  pipelines  one  mile at  a  time and  the                                                               
     complexity of it is not  tremendously affected by whether it                                                               
     is  100 miles  long  or 2,000  miles long.    It's the  same                                                               
     pipeline as you go through.   There are some differences and                                                               
     it does mean  you have to have more resources.   You have to                                                               
     have more  surveyors.   You have  to have  more right-of-way                                                               
     people.   You have to  have more environmental people.   You                                                               
     have to  have more  contractors.   But it  does not  make it                                                               
     more complex or more difficult to  manage.  It just makes it                                                               
     longer and more expensive.                                                                                                 
                                                                                                                                
3:21:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO noted repetitiveness would make the project less                                                                 
complicated and less expensive.                                                                                                 
                                                                                                                                
3:21:54 PM                                                                                                                    
                                                                                                                                
MR. SPARGER said  the crew does get  faster.  He said  to lay two                                                               
miles of requires  a lot of money to mobilize  the people and get                                                               
them ready to go.   There is a learning curve.   If the same crew                                                               
lays 200 miles, they get better every day.                                                                                      
                                                                                                                                
3:22:20 PM                                                                                                                    
                                                                                                                                
MR. SPARGER continued:                                                                                                          
                                                                                                                                
     The  other  thing is  that  AGIA  -  the requirement  for  a                                                               
     detailed project  description is  premature and costly.   If                                                               
     you can't  describe what  it is you're  going to  build, how                                                               
     can you  schedule it or come  up with a cost  estimate?  So,                                                               
     you  simply can't  respond to  AGIA.   You can't  respond to                                                               
     what's it  going to cost  and how long  is it going  to take                                                               
     unless you  know what it is  you're going to build  to start                                                               
     with.  You don't have to know  all the details.  You have to                                                               
     know how long  it is.  Are  you going to bury it  or are you                                                               
     not going  to bury it?   How many compressor  stations [are]                                                               
     you going  to have?   And  once again,  in North  America we                                                               
     know  what  the   requirements  are.    We   know  what  the                                                               
     environmental   requirements  are.     We   know  what   the                                                               
     regulators want -  Fish and Wildlife and EPA.   We know what                                                               
     they  want.   The rules  are  laid out.   These  engineering                                                               
     firms and construction contractors  know what the rules are.                                                               
     They know how to follow them so  you can come up with a very                                                               
     good project description for not a whole lot of cost.                                                                      
                                                                                                                                
3:23:32 PM                                                                                                                    
                                                                                                                                
     The last  point I  want to  make is  just an  observation of                                                               
     mine.  The project ...  schedule as currently proposed - the                                                               
     ones that  I've seen  are all  10 years  long from  start to                                                               
     ready for  service.  I  think that with a  timely commitment                                                               
     to firm transportation on the  part of enough shippers, that                                                               
    a person could shorten that schedule two or three years.                                                                    
                                                                                                                                
     I  don't  have  an  alternate   timeline  to  tell  you  but                                                               
     intuitively these  projects in the  Lower 48, with  the same                                                               
     regulations,  the same  FERC, the  same EPA,  these projects                                                               
     take three to  four years.  This would be  longer because of                                                               
     the short construction  season and because of  the fact that                                                               
     you have to  construct some of it in the  summer, some of it                                                               
     in the winter.  But even  given that, I'm saying seven years                                                               
     maybe  or eight,  but  not  10.   Now  that's assuming  that                                                               
     somebody  steps   forward,  the   shippers,  and   signs  FT                                                               
     agreements early  on so that  the pipeline  company, whoever                                                               
     that  may be,  has a  commitment  and then  we'll just  move                                                               
     forward.                                                                                                                   
                                                                                                                                
3:24:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO said  this mega project is going to  follow a road                                                               
where a pipeline already exists.                                                                                                
                                                                                                                                
3:25:01 PM                                                                                                                    
                                                                                                                                
MR. SPARGER advised members to  not compare this project to TAPS,                                                               
which was  a true grassroots project.   This project is  going to                                                               
build on the knowledge learned and  mistakes made on TAPS so that                                                               
those same  mistakes are not made  again.  The road  is in place,                                                               
as well  as the infrastructure.   Very few  new roads need  to be                                                               
built.   He  cautioned this  is not  a simple  project and  it is                                                               
large, but  it is still  just a pipeline.   He offered  to answer                                                               
questions.                                                                                                                      
                                                                                                                                
3:26:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO agreed  the project is just a pipeline.   He asked                                                               
Mr. Barger to clarify X70, X80, and X100.                                                                                       
                                                                                                                                
3:26:41 PM                                                                                                                    
                                                                                                                                
MR.  SPARGER  explained that  X70  stands  for 70,000  PSI  yield                                                               
strength or the strength of the  material.  The higher the number                                                               
for a given diameter of pipe,  for example 48 inches, the thinner                                                               
the wall.   As  the strength  increases the  thickness decreases.                                                               
As the wall  thickness decreases, the tons of steel  that need to                                                               
be  purchased decreases.   Therefore  you would  want to  use the                                                               
highest  commercially  grade steel  available  to  keep the  wall                                                               
thickness down and the cost  down.  X80 is commercially available                                                               
today; it was  not five years ago.   He said if  he was designing                                                               
the project, he would use X80.   If he was to order it four years                                                               
from now,  he would  want to  know if  the X100  was commercially                                                               
available at  that time.  If  it was marginal, he  would bid both                                                               
ways: using  X80 and X100.   However, he would  not use it  if it                                                               
had  not been  used  before because  this is  not  a project  for                                                               
experimentation.  He believed TransCanada  has used X100 on about                                                               
five miles of  pipeline and has possibly used  X120.  TransCanada                                                               
is experimenting  on a small  area of pipe  to see how  it reacts                                                               
and  bends.   Maybe  TransCanada  will  use  it  on 30  miles  of                                                               
pipeline on its next project but,  he repeated, it is not wise to                                                               
experiment with a 1700 or 1800 mile pipeline.                                                                                   
                                                                                                                                
3:29:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked what the wall thickness is on X80.                                                                         
                                                                                                                                
3:29:04 PM                                                                                                                    
                                                                                                                                
MR.  SPARGER  said it  is  about  one  inch  for a  48"  diameter                                                               
pipeline.                                                                                                                       
                                                                                                                                
CO-CHAIR GATTO thanked Mr. Barger  for his presentation and asked                                                               
Mr. Hobbs to present to the committee.                                                                                          
                                                                                                                                
3:29:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  noted that  after the Exxon  Valdez spill,                                                               
everyone felt the aging tanker fleet  needed to be replaced.  The                                                               
old  standard  heavy  thick  steel  tankers  were  taken  out  of                                                               
service.  Now the tankers are  built with high strength steel and                                                               
they  are  cracking  because  the high  strength  steel  is  less                                                               
flexible and hardens.  Therefore, the new tankers need constant                                                                 
repair.  He pointed out that when using the latest product, over                                                                
time problems surface.                                                                                                          
                                                                                                                                
3:31:00 PM                                                                                                                    
                                                                                                                                
SCOTT HOBBS, Energy Capital Advisors, related his background as                                                                 
follows:                                                                                                                        
                                                                                                                                
     I  have been  a consultant  for  about the  last six  years.                                                               
     During  that time  I was  actually chairman  of a  midstream                                                               
     natural  gas  company that  we  recently  sold.   It  was  a                                                               
     natural gas  gatherer and producer  in Wyoming,  in northern                                                               
     Louisiana,  East  Texas.   During  that  time  I've  advised                                                               
     investment   bankers,  different   potential  investors   on                                                               
     projects  as well  as some  private equity  firms that  have                                                               
     been  looking into  investments into  the energy  business -                                                               
     all  types,   pipelines,  and  various  and   sundry  energy                                                               
     ventures.  I am here  today on behalf of the Administration.                                                               
     I've been  asked to look at  a few questions that  have been                                                               
     raised,  points that  have been  made in  some of  the prior                                                               
     testimony  and I'll  try to  make  my comments  as brief  as                                                               
     possible but try to cover them as best I can.                                                                              
                                                                                                                                
3:32:19 PM                                                                                                                    
                                                                                                                                
MR. HOBBS continued:                                                                                                            
                                                                                                                                
     The discussion  topics I'd like  to cover today -  it's been                                                               
     suggested in some of the  previous testimony that there [is]                                                               
     really  only  one way  this  project  can move  forward  and                                                               
     that's for  the producers to  own this pipeline and  to move                                                               
     it forward essentially  on their terms.  I  think they would                                                               
     like to own and build on  their schedule.  I'm going to take                                                               
     a moment and  talk about the advantages  and risk associated                                                               
     with a  producer committing to  a third party to  build this                                                               
     pipeline  because it  may be  that  that is  what the  state                                                               
     ultimately pursues.   It  may be  what's in  everyone's best                                                               
     interest,  perhaps not  the producers  and we'll  talk about                                                               
     that.   When I  talk about  producers as  some of  the prior                                                               
     folks have  discussed, I'm talking about  ExxonMobil, Conoco                                                               
     Phillips and BP.                                                                                                           
                                                                                                                                
     There's  also  been a  number  of  ... representations  made                                                               
     about  how  firm transportation  is  accounted  for and  how                                                               
     that's going  to create  some real  burden or  impairment on                                                               
     the party that  signs those contracts.  I'll  speak to that.                                                               
     And then there also has  been serious questions raised about                                                               
     the economics  that were performed  by Dr. Scott and  DNR in                                                               
     trying to  evaluate is this  a commercial project.   Is this                                                               
     an economic  project for  the producers?   And I'm  going to                                                               
     speak  to  that and  I'll  conclude  with a  few  conclusive                                                               
     remarks.                                                                                                                   
                                                                                                                                
3:33:54 PM                                                                                                                    
                                                                                                                                
     Let's start with the advantages  and the risk of contracting                                                               
     for firm transportation on a  pipeline as compared to owning                                                               
     it and building it yourself.   Probably the most significant                                                               
     advantage  for a  producer with  a substantial  reserve base                                                               
     like  we have  here on  the North  Slope is  they avoid  the                                                               
     front end  capital costs.   You've heard,  quite eloquently,                                                               
     Mr. Hosie  discussed about the  returns that  the producers,                                                               
     and  in  particular  Exxon, are  earning  on  their  typical                                                               
     investment.    Actually  they're   making  greater  than  30                                                               
     percent return  on investment.   That's what they  showed in                                                               
     their most recent 10K.   It's interesting when they say they                                                               
     need to own this project  because this pipeline will provide                                                               
     on a  comparable basis a  return on investment  of somewhere                                                               
     around 8  to 9  percent so  I find  that peculiar  that they                                                               
     would want  to own this pipeline  with such a low  return by                                                               
     comparison with what their alternatives are.                                                                               
                                                                                                                                
     So,  I'm here  to tell  you that  I think  it would  be very                                                               
     advantageous  for them  to  use that  capital  for those  30                                                               
     percent projects and  not an 8.5 percent  project, but we'll                                                               
     get to  that and  maybe perhaps  understand a  little better                                                               
     why they want to own this project.                                                                                         
                                                                                                                                
     I  think  they have  an  ability  to improve  their  project                                                               
     economics by  not owning  this pipeline.   I think  they can                                                               
     avoid  a lot  of risk  by  contracting with  a third  party.                                                               
     You've  already  heard  Mr. Sparger  talk  about  negotiated                                                               
     rates.   They  can  actually  allocate through  negotiations                                                               
     with a  third party  pipeline provider.   They  can allocate                                                               
     risk  to that  party,  most notably  cost  overrun risk  and                                                               
     we'll talk about  that.  So, there are -  and they can force                                                               
     certain  schedule requirements  if they  do desire  for this                                                               
     pipeline to be built by a certain timeframe.                                                                               
                                                                                                                                
     So, those  are commonplace  in agreements  between pipelines                                                               
     and producers  or shippers.   I failed  to mention I  was an                                                               
     executive at a pipeline for -  well I was actually the chief                                                               
     operating officer  for the last  eight years.  I  worked for                                                               
     two  natural gas  pipeline companies  in the  Lower 48,  two                                                               
     major pipelines,  for about 24 years  so I do have  a bit of                                                               
     experience  to  draw  on  in  terms  of  talking  about  how                                                               
     producers,  how shippers  negotiate with  pipeline companies                                                               
     and  how those  risks are  shared or  allocated between  the                                                               
     parties.                                                                                                                   
                                                                                                                                
3:36:48 PM                                                                                                                    
                                                                                                                                
     I  will tell  you  that  when you  look  at ExxonMobil,  BP,                                                               
     Conoco, they  all have  major projects  all over  the world.                                                               
     Look at their annual report.   They have LNG projects.  They                                                               
     have  major -  more conventional  gas projects.   They  have                                                               
     tremendous  projects  that  are  going on  everywhere.    By                                                               
     contracting with a  third party for this  pipeline, they can                                                               
     actually avoid  what would be  a significant drain  on their                                                               
     human resources.   You read  in a  lot of industry  text now                                                               
     about -  that is one of  the major issues that  the industry                                                               
     is  facing.   Its workforce  is  getting older.   The  young                                                               
     people have  not been coming  into the business.   They need                                                               
     capable  people  to  manage  projects  and  to  perform  the                                                               
     functions they have to be successful.                                                                                      
                                                                                                                                
     By contracting with  a third party, such as  those that have                                                               
     come  forth  and  made  proposals,   or  at  least  provided                                                               
     testimony  to  the   Legislature,  that  being  TransCanada,                                                               
     Enbridge, MidAmerican  - as  we've said  there may  be other                                                               
     parties  that  become interested  in  this  project.   These                                                               
     people   have  very   strong  regulatory   and  construction                                                               
     expertise  in  building pipelines  in  North  America.   Mr.                                                               
     Sparger has talked  about that.  I think  there's an ability                                                               
     to tap  that capability, contract and  protect yourself with                                                               
     the appropriate terms  in that contract and lay  off some of                                                               
     that work,  that effort, that risk  on a third party.   That                                                               
     is not an unreasonable strategy for a producer to pursue.                                                                  
                                                                                                                                
     Okay, well  why wouldn't they do  that?  Well let's  look at                                                               
     the risk.   What you've heard  is that if they  don't manage                                                               
     this project,  they are going to  end up paying for  all the                                                               
     cost overruns.                                                                                                             
                                                                                                                                
3:38:30 PM                                                                                                                    
                                                                                                                                
     Hopefully we've  debunked that theory.   The last  ten years                                                               
     do not  support that.   Their  own experience  and contracts                                                               
     that they've  executed support  the fact  that they  can put                                                               
     off  that  risk or  lay  off  that  risk  on a  third  party                                                               
     pipeline.  That's  very prevalent in the Lower 48.   In this                                                               
     case, I will tell you that  I don't think that the producers                                                               
     would be  able to lay  off 100  percent of the  cost overrun                                                               
     risk  here.   It will  be  some sort  of negotiated  sharing                                                               
     arrangement.                                                                                                               
                                                                                                                                
     That's  a logical  outcome for  a project  of this  size and                                                               
     complexity but, I will tell  you, they can very easily force                                                               
     a  pipeline company  to  take enough  risk  where they  will                                                               
     [have a  high incentive] to  build this pipeline  on budget,                                                               
     otherwise  they will  be  facing  substantial reductions  in                                                               
     their return and potentially even a loss situation.                                                                        
                                                                                                                                
3:39:22 PM                                                                                                                    
                                                                                                                                
MR. HOBBS continued:                                                                                                            
                                                                                                                                
     The  ability to  finance the  project -  well, you've  heard                                                               
     stated that really  you have to be an ExxonMobil  or a BP to                                                               
     get  this  project  financed.     I  will  tell  you  in  my                                                               
     experience that  is probably  another overstatement.   Think                                                               
     about it.   You  have a  federal loan  guarantee here.   You                                                               
     have  very capable  pipeline  operators  that are  operating                                                               
     very sizeable  companies and you  have world  class reserves                                                               
     that have already  been proven that are  being recycled into                                                               
     the  ground.   Those are  the  components for  a very  solid                                                               
     project.   This  project  will  be financed.    You do  need                                                               
     ultimately,  firm transportation  contracts,  which I  think                                                               
     will ultimately  be signed, but this  project, although it's                                                               
     very large, will be financed  and can be financed by parties                                                               
     other than the big producers.                                                                                              
                                                                                                                                
     So why  is it that this  project is in the  position that it                                                               
     is  and has  been for  years?   I believe  if the  producers                                                               
     contract with  a third party  or put forth a  proposal under                                                               
     AGIA, they lose  control of the process.   It's that simple.                                                               
     They can  no longer  dictate the  design, the  schedule, the                                                               
     tariff  provisions or  the rate  designs that  might promote                                                               
     competition  or development  by  third parties.   Once  they                                                               
     fall  into  either  a  third  party  or  an  AGIA  sponsored                                                               
     project, these  types of, let's  say - these types  of items                                                               
     that  are  available  to  them  - what  they'd  be  able  to                                                               
     accomplish  if  they were  owner  and  the shipper,  are  no                                                               
     longer available to  them and that is exactly  what AGIA has                                                               
     been designed to  do.  Quite frankly I think  that is one of                                                               
     the reasons  that they  have so much  trouble with  AGIA and                                                               
     why they also  don't want a third party.   They are going to                                                               
     give  up a  lot of  power, so  to speak,  negotiating power,                                                               
     market  power,  call  it  what  you will.    They  are  good                                                               
     businessmen.   They  are  trying to  maximize  the value  of                                                               
     their investment and,  in so doing, they'd like  to keep the                                                               
     position they currently enjoy.                                                                                             
                                                                                                                                
3:41:40 PM                                                                                                                    
                                                                                                                                
MR. HOBBS continued:                                                                                                            
                                                                                                                                
     Moving on, there's been a  lot said about the accounting for                                                               
     firm transportation  agreements.   It's been stated  that FT                                                               
     agreements are debt  or they are at least  debt-like.  Well,                                                               
     having reviewed the producers' 10Ks,  Mr. Hosie explained to                                                               
     you that there's  a lot of information in  their annual 10Ks                                                               
     that  they file  every year.    FT agreements,  at least  as                                                               
     these  producers  -  and  quite   frankly  as  the  industry                                                               
     generally  handles them  in their  accounting, they  are not                                                               
     debt,  they  are   not  debt-like  in  that   they  are  not                                                               
     capitalized or recorded  on the balance sheet.   That is not                                                               
     the way firm transportation agreements are handled.                                                                        
                                                                                                                                
3:42:45 PM                                                                                                                    
                                                                                                                                
     If you look at their  10ks, and I brought ConocoPhillips' as                                                               
     an example ... this is a copy  of an excerpt from Note 18 in                                                               
     ConocoPhillips' financial  statements.  Every  major company                                                               
     will  have   a  note   that  speaks  to   contingencies  and                                                               
     commitments.  What  I've done is taken an  excerpt, and I'll                                                               
     just scroll down.   If you look at  the highlighted portion,                                                               
     interestingly  enough,   you'll  see  a  reference   to  the                                                               
     Venezuelan   government  and   the   fact   that  they   may                                                               
     nationalize  - they're  considering  it.   Obviously  that's                                                               
     happened - so much for fiscal certainty.                                                                                   
                                                                                                                                
     Here  it is  in  highlight.   This  is  the disclosure  that                                                               
     ConocoPhillips makes  for certain  FT agreements.   It's not                                                               
     on the balance  sheet.  It's in a note  to the balance sheet                                                               
     and  essentially to  make this  disclosure  - it  has to  be                                                               
     directly tied to a financing  of a project that's providing,                                                               
     in this  case, the service  that they've signed a  long term                                                               
     throughput  commitment  on.   They're  called  unconditional                                                               
     purchase  obligations.   I  realize  this  is a  little  bit                                                               
     arcane  from an  accounting  standpoint, but  the point  I'm                                                               
     trying  to make  is  it has  to fall  into  a very  specific                                                               
     category.   Look  at  the  amounts -  $77  million was  what                                                               
     they're   estimating  they   would   pay  under   throughput                                                               
     agreements or take or pay  agreements that are in support of                                                               
     financing arrangements.   That's a  key term.  If  the terms                                                               
     of  this are  not directly  tied  to the  financing of  this                                                               
     facility, it's not required to be disclosed.                                                                               
                                                                                                                                
     You look  at the amounts there.   This is what  is disclosed                                                               
     in a note to  the financial.  It is not debt.   It is not on                                                               
     the balance sheet.  This is what's required.                                                                               
                                                                                                                                
3:45:03 PM                                                                                                                    
                                                                                                                                
     They also  have a  section called The  Management Discussion                                                               
     and  Analysis  of Financial  ...  Condition  and Results  of                                                               
     Operations.   Again,  I've tried  to highlight  the relevant                                                               
     points.  Here they're spelling  out all of their contractual                                                               
     obligations.   This is a  supplemental disclosure.   This is                                                               
     not on  the balance  sheet.   This is  what's filed  in what                                                               
     they call the MD&A of the  SEC.  Total debt you'll see there                                                               
     is $27  billion.  Interestingly  enough, what  we're talking                                                               
     about here falls under purchase  obligations and if you read                                                               
     that note,  Note B,  they go through  a litany  of different                                                               
     purchase   obligations  that   actually  aggregate   to  $93                                                               
     billion.   I  can assure  you ConocoPhillips  does not  want                                                               
     anyone telling  someone else that  they have $93  billion of                                                               
     debt.   That's not the case.   This is just  a disclosure of                                                               
     contractual commitments.   Included in that  is $3.8 billion                                                               
     related to transportation.  That's  the sum total of all the                                                               
     agreements they've made to transport  gas, oil, whatever, on                                                               
     pipelines   where  they've   made  throughput   commitments.                                                               
     Compare that to  the $70 million that we  were talking about                                                               
     earlier.                                                                                                                   
                                                                                                                                
     So  obviously,   what's  disclosed  in  the   notes  of  the                                                               
     financial has to meet very  specific criteria.  Here they've                                                               
     gone forth  and said here's  everything we've got  out there                                                               
     and this  is the  way these  agreements would  be disclosed.                                                               
     So, in summary,  it's not debt.  You can  see it's separate.                                                               
     There  is  a  disclosure.    That's  just  good  management.                                                               
     They're  trying to  show what's  going on  but they  do this                                                               
     everyday.  This is done  in the ordinary course of business.                                                               
     What a pipeline operator would be  asking them to do here is                                                               
     no different than what they've  done in countless situations                                                               
     where they operate.                                                                                                        
                                                                                                                                
3:47:27 PM                                                                                                                    
                                                                                                                                
     The  last item  I'd  like  to -  actually  there's two  more                                                               
     items.  It has been said  that if they sign an FT agreement,                                                               
     that's going  to create a  real burden or impairment  on the                                                               
     company.    I  will  tell  you  that  if  they  sign  an  FT                                                               
     agreement,   it  will   actually  enhance   their  financial                                                               
     position.   The reason is  they are unlocking  this treasure                                                               
     chest of reserves  that have been sitting in  Prudhoe Bay or                                                               
     Point Thomson for  a very long time.  When  you talk about a                                                               
     ratings agency,  that being Moody's  or S&P, it's  also been                                                               
     said  that  they're  going  to   look  at  this  negatively.                                                               
     Actually   they're  going   to  look   at  the   contractual                                                               
     obligation  that  one  of  these parties  or  all  of  these                                                               
     parties   when    they   sign   an   agreement    for   firm                                                               
     transportation,  they will  in  fact build  that into  their                                                               
     analysis.  But, equally,  and perhaps more importantly, they                                                               
     are going  to look  at the  cash flow it  creates.   In this                                                               
     case, it's  going to  generate significant  incremental cash                                                               
     flow because  they now can  sell gas that heretofore  had to                                                               
     be recycled or left in the ground.                                                                                         
                                                                                                                                
CO-CHAIR GATTO  said he is glad  Mr. Hobbs is commenting  on this                                                               
subject  because Mr.  Antony Scott  told the  committee the  same                                                               
thing and was  immediately challenged by the  producers, who said                                                               
he failed to include that as debt.                                                                                              
                                                                                                                                
3:48:43 PM                                                                                                                    
                                                                                                                                
MR. HOBBS  explained it is  neither debt nor an  asset.  It  is a                                                               
contractual  right to  move gas  in  a pipeline.   However,  that                                                               
right creates significant value for  the holder of that capacity.                                                               
If, ten  years down the road,  they don't need as  much capacity,                                                               
they  have the  right to  sell it  to someone  else as  "capacity                                                               
release."  They  can release it to another party  and lay off the                                                               
risk  of that  capacity  to that  party.   That  right unlocks  a                                                               
tremendous value.   He opined  the rating agencies will  see this                                                               
as being very  favorable because they will not commit  to this FT                                                               
unless reserves support it.                                                                                                     
                                                                                                                                
3:49:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  referred to an e-mail  that was circulated                                                               
to members about debt consideration.   It said a bankruptcy court                                                               
only  considers  the   first  year  of  FT  as   a  liability  in                                                               
bankruptcy.    He  asked  Mr.  Hobbs  if  he  could  verify  that                                                               
information.   He thought regular  debt is put into  a bankruptcy                                                               
court at full value.  He  questioned if, under FT, the bankruptcy                                                               
would only look at debt for the current year.                                                                                   
                                                                                                                                
3:50:39 PM                                                                                                                    
                                                                                                                                
MR. HOBBS  said, in  his experience, it  depends on  the specific                                                               
contracts.  He explained:                                                                                                       
                                                                                                                                
     Generally  you have  to look  at who  the party  is that  is                                                               
     bankrupt.    In the  case  of  a  pipeline company,  if  the                                                               
     pipeline went  bankrupt, more than  likely the  trustee will                                                               
     step in,  or the court, and  say this is a  revenue producer                                                               
     for  the  pipeline.    Whoever  the  new  operator  of  that                                                               
     pipeline  is -  if  they bring  someone else  or  if it's  a                                                               
     debtor  in  possession,  they  will   order  that  party  to                                                               
     continue to provide the service  so the revenues keep coming                                                               
     in.  The  flip side I believe is what  you are talking about                                                               
     where the party  who actually has the obligation  to pay the                                                               
     firm  transportation charges  and use  it, that's  where the                                                               
     one year limitation comes in.   Generally if it was debt, it                                                               
     would be  just what you  said.  They  would have to  look at                                                               
     the dollar amount in its  entirety because at the date there                                                               
     would  be  a  conveyance  of money  and  a  debt  instrument                                                               
     created.  In  this case there's just a contract  that says I                                                               
     will use  your pipe for  10, 20,  30 years, whatever.   It's                                                               
     paid over time.  It's a  commitment to use, and for that the                                                               
     provider has  to give the  service back.  In  that instance,                                                               
     if the party that signed the  FT agreement to ship the gas -                                                               
     they  would be  probably  limited to  that  one year  amount                                                               
     you're talking about so another  reason that it's really not                                                               
     debt.                                                                                                                      
                                                                                                                                
3:52:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO noted  that Enron was a pipeline  company that was                                                               
not only  bankrupt, but was zeroed  out and the gas  continued to                                                               
flow.                                                                                                                           
                                                                                                                                
3:52:19 PM                                                                                                                    
                                                                                                                                
MR. HOBBS said  he worked with a group of  private equity players                                                               
and industry  players to  purchase the Enron  assets.   Enron was                                                               
bankrupt  but the  Transwestern pipeline,  Florida Gas  and their                                                               
general partnership  interest in  Northern Border  were operating                                                               
every day because  they were viable companies, as  opposed to the                                                               
parent  company  or  trading  operations,   which  is  where  the                                                               
problems were.  In that case  the bankruptcy did not affect them.                                                               
They continued to operate daily.   Ultimately the trustee stepped                                                               
in and said assets would be sold to pay creditors.                                                                              
                                                                                                                                
3:53:19 PM                                                                                                                    
                                                                                                                                
MR. HOBBS continued:                                                                                                            
                                                                                                                                
     If  you look  at  producer economics,  one  of the  comments                                                               
     that's  been   made  is  that  the   Department  of  Natural                                                               
     Resources,  in particular  Dr.  Scott's  analysis, was  just                                                               
     really faulty.   I have spent  a good deal of  time with Dr.                                                               
     Scott, reviewed the model.  I  will tell you that I think it                                                               
     is  very  reasonable.     I  think  what   they've  done  is                                                               
     reasonable  based   on  the   best  information   they  have                                                               
     available.   I think  it's very important  to know  that the                                                               
     producers, and  you know this  of course, have  not provided                                                               
     any economic  studies to support their  contention that this                                                               
     is not commercially  viable.  So, what happened  is, I think                                                               
     DNR has had to use  the best information they have available                                                               
     in trying  to estimate is  this an economic project  for the                                                               
     producers.   I will tell  you that based on  everything I've                                                               
     seen, it clearly is.                                                                                                       
                                                                                                                                
     What they've  done - if you  step back and think  about what                                                               
     is it  that makes  a producer project  economic, I  tried to                                                               
     list the  factors there.   Obviously the first  and foremost                                                               
     is:  Is  there  adequate  gas  reserves  and  deliverability                                                               
     getting the  gas out of the  ground?  Is there  adequate gas                                                               
     to make this  project viable?  This  particular situation is                                                               
     unprecedented from my  experience to have the  volume of gas                                                               
     proven  and  already  being produced  and  recycled.    This                                                               
     volume  is  extraordinary.     So  that  really   is  not  a                                                               
     significant issue.                                                                                                         
                                                                                                                                
     Then  you have  - what  is  it going  to cost  to treat  and                                                               
     transport this gas  to market?  That's where  the model that                                                               
     DNR has developed  - they brought in  consultants from Block                                                               
     and Beach, who  are experts that work with  Lukens (ph), the                                                               
     subsidiary  of Black  and Veatch.   J.  Lukens is  very well                                                               
     known  in the  industry as  an old  rates guy  from Transco.                                                               
     They did a  lot of work to help them  develop what the rates                                                               
     would  be under  a pipeline  project because  ultimately the                                                               
     shipper, the  producer, will  pay those  costs.   So they've                                                               
     tried to come up with a reasonable set of costs for that.                                                                  
                                                                                                                                
     The  commodity  prices -  well,  obviously  if you  talk  to                                                               
     anyone in  the gas business they  will tell you they  have a                                                               
     guess  cost estimate  so they've  created I  don't know  how                                                               
     many  different price  paths  and  possibilities and  that's                                                               
     what that distribution  of possibilities was to  try to come                                                               
     up with  the best  analysis of what  is the  most reasonable                                                               
     gas price.  And then  they showed different levels, which is                                                               
     really what  you have to do.   What if gas  costs this much?                                                               
     What  if  it  generates  this  much revenue?    What  if  it                                                               
     generates  this  much?   So  they've  looked at  alternative                                                               
     commodity prices to a great extent.                                                                                        
                                                                                                                                
     Then  you have  to try  to determine  additional development                                                               
     costs.  What's  it going to take to bring  Point Thomson in?                                                               
     Obviously Prudhoe  is not going  to cost much to  bring that                                                               
     gas on.   Most  of the  infrastructure is  there.   And then                                                               
     they've looked at operating costs,  taxes and royalties, who                                                               
     better than the lessee, in  this case particularly under the                                                               
     [petroleum production profits tax]  PPT regime, to know kind                                                               
     of what these costs are.                                                                                                   
                                                                                                                                
     So, I think  the model is reasonable.  I  think it speaks to                                                               
     all  of these,  which  I consider  the  primary drivers  for                                                               
     producer economics.                                                                                                        
                                                                                                                                
3:56:36 PM                                                                                                                    
                                                                                                                                
     The  conclusion I've  reached  is it  is  very difficult  to                                                               
     construct a worst case scenario  where the producers did not                                                               
     continue to make or have  solid economics.  It's really hard                                                               
     to  find  a scenario  that's  reasonable  where they're  not                                                               
     going to  have rock solid  economics.   And I need  to point                                                               
     out, that's with  significant upside.  We can  try to create                                                               
     a  perfect  storm on  the  downside  but  what if  the  true                                                               
     perfect storm,  i.e. Hurricane Katrina,  hits and  takes out                                                               
     almost the  entire Gulf  of Mexico  production.   Gas prices                                                               
     went  to the  low teens  - actually  about $15  for a  short                                                               
     period of time.                                                                                                            
                                                                                                                                
     Under that scenario,  gas prices - that's how  you reach the                                                               
     astronomical returns that were cited.   I don't believe they                                                               
     got anywhere  close to  that in  the analysis  they did.   I                                                               
     think  they stopped  at $9.   So,  the point  is, under  any                                                               
     reasonable  gas price  scenario,  I think  this  is a  solid                                                               
     project.    If  you  give   that  gas  price  a  50  percent                                                               
     reduction, if  you increase current estimated  capital costs                                                               
     by 50  percent that  is my  reasonable worst  case scenario.                                                               
     The producers  would still  earn in excess  of a  20 percent                                                               
     rate of return.                                                                                                            
                                                                                                                                
     So, when  they say it's  not economic  - this is  where they                                                               
     need to  come forth  and show  us how,  because I  can't get                                                               
     there.   So  what have  they done?   They've  said well  Dr.                                                               
     Scott has not done his  economics properly because he didn't                                                               
     capitalize the cost of FT  or he didn't recognize that there                                                               
     are huge capital costs associated  with this project.  Well,                                                               
     if  you contract  with a  third  party, those  are not  your                                                               
     capital  costs and  you do  not have  to capitalize  that FT                                                               
     agreement.   In fact,  as we've already  shown, capitalizing                                                               
     that is entirely inconsistent with  the way they account for                                                               
     it in their  financial statements.  So, once  again there is                                                               
     an inconsistency between  what they are stating  needs to be                                                               
     done and the way they are accounting for it.                                                                               
                                                                                                                                
     So, in this case, I think  it is entirely reasonable to look                                                               
     at the  FT costs  exactly as  the model  and DNR  have done.                                                               
     That is as an expense.   They take it off the delivered cost                                                               
     of  gas, the  delivered price.    They reduce  that for  the                                                               
     tariff costs,  the transportation  costs both in  Canada, in                                                               
     Alaska and  for the gas  treatment plant  to come up  with a                                                               
     net-back price.                                                                                                            
                                                                                                                                
     Let me  put this maybe in  perspective.  If we  could turn a                                                               
     switch tomorrow  and this  pipeline was  built based  on the                                                               
     best  cost estimates  we have  right now  and the  ... rates                                                               
     that had been calculated under  the tariff model that Lukens                                                               
     and DNR  have created,  I'll walk you  through what  I think                                                               
     the current day economics would be.                                                                                        
                                                                                                                                
3:59:23 PM                                                                                                                    
                                                                                                                                
     Look at the  current 12 month gas price.   This is traded in                                                               
     the futures market.   You take the current gas  price.  It's                                                               
     roughly  $8.60.   That's  the average  price  at Henry  Hub.                                                               
     That's the  benchmark price for  natural gas right  now over                                                               
     the next  12 months.   This  is from a  couple of  days ago.                                                               
     Back off  what is  a price  differential called  the Alberta                                                               
     price  differential or  basis  swap.   You  can  lock in  by                                                               
     buying futures  or - on a  forward price curve you  can lock                                                               
     in the  price for  what the  differential between  Henry Hub                                                               
     and Alberta is, you can actually  go out and buy that on the                                                               
     exchange.  That's roughly $1.17,  just to use rough numbers.                                                               
     That gets you to about $7.50  is the price in Alberta.  This                                                               
     is over the next 12 months.   I'm assuming that we've turned                                                               
     the gas on  and it's flowing down the pipe.   Then you would                                                               
     subtract  from  that  $7.50  the  $2.00  pipeline  and  [gas                                                               
     treatment  plant]  GTP  cost.    That's  what  is  currently                                                               
     estimated at the  $20 billion project level.   That gets you                                                               
     to  $5.50  is  what  the   producers  would  enjoy  for  gas                                                               
     delivered into  the pipe -  actually into the  gas treatment                                                               
     plant.   That  results in  a  $5.50 net-back  price for  the                                                               
     producers.  They would actually  - what's been proposed - it                                                               
     would be about 4.5 bcf a  day.  That provides about 1.64 tcf                                                               
     a year.   You take that  $5.50 price times 1.64  tcf and you                                                               
     have $9  billion in  the first  year.  So  that is  what the                                                               
     producers would  enjoy in  the current  - obviously  this is                                                               
     going to take  10 years to build but if  they could turn the                                                               
     pipe  on  tomorrow  using  current  pricing,  using  current                                                               
     capital  cost  estimates,  the   producers  would  enjoy  $9                                                               
     billion in year one.                                                                                                       
                                                                                                                                
     Now, they need to pay operating  costs, they need to pay the                                                               
     state's royalty  share, they need  to pay any sort  of Capex                                                               
     that's required.  But they've got  a substantial - so when I                                                               
     say  it's difficult  to construct  a  reasonable worst  case                                                               
     scenario  where  this  isn't   economic,  that  puts  it  in                                                               
     perspective for you.  $9 billion is a big number.                                                                          
                                                                                                                                
4:02:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO noted that is [calculated] with current gas                                                                      
prices so in 10 years the prices will double.                                                                                   
                                                                                                                                
4:02:33 PM                                                                                                                    
                                                                                                                                
MR. HOBBS said  the Department of Energy's  (DOE's) forecast puts                                                               
the price  close to  $8.60.  Over  the next 15  to 20  years, the                                                               
forecast has  gas prices  ranging from $8.50  to $9.00,  not that                                                               
the government forecast is better than others.                                                                                  
                                                                                                                                
4:03:00 PM                                                                                                                    
                                                                                                                                
MR. HOBBS continued his presentation:                                                                                           
                                                                                                                                
     So this number is  not out of line but the  pipe needs to be                                                               
     built.   There  are  a lot  of challenges  that  need to  be                                                               
     overcome.                                                                                                                  
                                                                                                                                
     So, in  conclusion, I  guess from  my perspective  there are                                                               
     very real  advantages for the  producers contracting  for FT                                                               
     with a  third party  versus owning  the pipeline  but that's                                                               
     their decision.  They can go  forward under AGIA or they can                                                               
     go  forward   outside  of  AGIA  and   build  this  pipeline                                                               
     themselves.   I  think there  are very  real incentives  for                                                               
     them  to   move  forward.     Contracting   for  FT   on  an                                                               
     independently  owned  pipe  will not  adversely  affect  the                                                               
     producer.   In fact,  it's actually  going to  enhance their                                                               
     financial position.                                                                                                        
                                                                                                                                
     Finally, under any reasonable scenario, they should enjoy                                                                  
     very favorable returns whether they decide to own this                                                                     
     project or they contract with a third party.                                                                               
                                                                                                                                
4:03:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO thanked Mr. Hobbs  and asked Mr. Harper to address                                                               
the committee.                                                                                                                  
                                                                                                                                
4:04:28 PM                                                                                                                    
                                                                                                                                
RICK HARPER,  Consultant, Econ One  Research, Inc.,  informed the                                                               
committee that he  is appearing as an advisor  to the Legislative                                                               
Budget and  Audit Committee (LBA).   He related that he  has been                                                               
involved in the energy business for over 34 years.                                                                              
                                                                                                                                
4:04:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  noted the  previous testifiers  were paid  by the                                                               
Administration  so  one could  almost  say  they represented  the                                                               
Administration.  He  felt their testimony was sound  but said Mr.                                                               
Harper is paid by the Legislature.                                                                                              
                                                                                                                                
4:05:14 PM                                                                                                                    
                                                                                                                                
MR. HARPER said he was with ARCO  for 15 years and then served as                                                               
an  advisor for  10  years after  that.   He  noted  that he  ran                                                               
Atlantic   Richfield's  North   American  natural   gas  business                                                               
activities.   He also noted that  he served as president  of ARCO                                                               
Gas and  was also  an executive member  of ARCO's  royalty policy                                                               
committee,  which  dealt with  the  issues  Mr. Hosie  discussed.                                                               
Those issues were alive then and are  alive now.  He was also the                                                               
CEO  and  President  of  a   Canadian  oil  and  gas  exploration                                                               
production company  operating throughout the  Western sedimentary                                                               
basin in Canada.   Most recently, Mr. Harper related  that he was                                                               
senior  vice   president  of   Northwest  Natural   Gas  Company,                                                               
operating in  the Pacific Northwest.   For the past six  years he                                                               
has   run  an   international   oil  and   gas  consulting   firm                                                               
headquartered  in  Houston,  Texas.    He  has  worked  with  the                                                               
Legislature  in  collaboration  with  Econ One.    He  noted  Mr.                                                               
Leitzinger and Mr. Pulliam of Econ  One could not attend today so                                                               
he will make a few comments on their behalf.                                                                                    
                                                                                                                                
4:07:26 PM                                                                                                                    
                                                                                                                                
MR. HARPER began his presentation, as follows:                                                                                  
                                                                                                                                
     My presentation  is a  little different  than it  might have                                                               
     been, if not for the events  earlier today.  I will tell you                                                               
     that,  as  I've told  a  number  of  you  who are  here  and                                                               
     listening, this  is really just  the beginning.  I  think it                                                               
     was  said by  some  of you  on  the floor  and  then at  the                                                               
     Governor's press  conference that really, in  some ways, the                                                               
     more  important decisions  for you  may  be yet  to come  so                                                               
     everything you  are hearing  today and  have heard  today is                                                               
     still  very pertinent,  not  dated in  the  least, and  I've                                                               
     tried  to tailor  my comments  in light  of what's  happened                                                               
     today to help begin to equip you for what will be to come.                                                                 
                                                                                                                                
     There's been  a lot  of hyperbole over  the last  months and                                                               
     years  and, as  Spencer  and  Scott and  Ken  and Bill  have                                                               
     advised  you,  you  would expect  hyperbole  and  you  would                                                               
     expect  the parties  to  represent  their interests  because                                                               
     this has been  to date in the context of  a negotiation.  So                                                               
     it's been our job as  your legislative consultants to try to                                                               
     create a no  spin zone for you  and I feel that  has been my                                                               
     job.  I have no stake in this.   I have no family member who                                                               
     is involved or employed.  I  own no stock interest in any of                                                               
     this so that has been my goal.                                                                                             
                                                                                                                                
4:09:01 PM                                                                                                                    
                                                                                                                                
     So I  guess my  comments today are  going to  revolve around                                                               
     and actually  will fit very  nicely with many of  the things                                                               
     that  have  been very  accurately  said  here today  by  the                                                               
     Administration's team  to talk a  little bit about  the risk                                                               
     parameters, the  kind of decisions  that go on  in producing                                                               
     companies,  how   they  make  decisions,  and   in  pipeline                                                               
     companies because you're  going to be reflecting  on that as                                                               
     projects and consortiums come forward,  I believe, to you in                                                               
     the not too distant future.   To talk a little bit about how                                                               
     economics  are viewed  and  to  talk also  about  how FT  is                                                               
     viewed.   We  still think  that's a  live issue.   We  don't                                                               
     think - Mr. Hobbs and I don't  think that this is the end of                                                               
     that subject coming before you.                                                                                            
                                                                                                                                
4:09:28 PM                                                                                                                    
                                                                                                                                
MR. HARPER continued:                                                                                                           
                                                                                                                                
     At any  rate, so  my comments  are generally  qualitative in                                                               
     light of  the events that have  happened today.  But  I will                                                               
     tell you this.  I support  fully the thesis that this is not                                                               
     -  not a  high  risk  venture.   It  is  an extremely  large                                                               
     venture but there is a very big difference.                                                                                
                                                                                                                                
     What  we have  in  North America,  certainly throughout  the                                                               
     United States  and Canada, is  an extremely  mature business                                                               
     infrastructure  in  natural gas.    We  have well  developed                                                               
     legal  and  regulatory precepts.    We  have well  developed                                                               
     markets.    This  project  is  not  contingent  upon  market                                                               
     development in any sense of the  word.  It is not contingent                                                               
     upon downstream  infrastructure development in any  sense of                                                               
     the word and  it is not, for the most  part, contingent upon                                                               
     upstream  reserve development.   So  when you  look at  both                                                               
     ends  of  this thing,  you've  got  the greatest  degree  of                                                               
     certainty  that I've  seen in  pipeline construction,  in FT                                                               
     subscription in my business.                                                                                               
                                                                                                                                
4:10:39 PM                                                                                                                    
                                                                                                                                
     I  will  also state,  as  I  said  before and  created  some                                                               
     excitement and  support in some  of those in  the geological                                                               
     and  geophysical roles  in  DNR, some  of  which I've  known                                                               
     through the  years, I really  think what's at issue  for you                                                               
     good  folks here  today,  the key  decision  makers here  in                                                               
     Alaska, this  is not  about 35 trillion  cubic feet  of gas.                                                               
     This is about a whole lot  more because, just like Texas and                                                               
     Louisiana in  the '50s and  '60s and,  to a large  extent in                                                               
     the '70s,  nobody's been up  here purposely looking  for gas                                                               
     for obvious  reasons.  That  is going to change,  I believe,                                                               
     beginning today  and, in fact,  I think it's  changed before                                                               
     today.  I  think you've seen other companies  coming in here                                                               
     recently who haven't been here  taking very, very large land                                                               
     positions  in gas-prone  basins.   So,  as  you think  about                                                               
     this, I  ask you to  think about it well  beyond the 35.   I                                                               
     think it's the tip of  the iceberg and, personally, and this                                                               
     is  very subjective,  I think  the potential  estimates that                                                               
     you've seen are understated.                                                                                               
                                                                                                                                
4:11:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO felt the big concern is whether the pockets are                                                                  
big pockets or many small pockets.                                                                                              
                                                                                                                                
4:11:32 PM                                                                                                                    
                                                                                                                                
MR.  HARPER said  it is  one of  the few  areas in  North America                                                               
where  there,  he  believes, is  "legitimate  elephant  potential                                                               
remaining,"  which  is  what  the   majors  refer  to  for  large                                                               
development opportunities.   He noted he was  heavily involved in                                                               
the Western sedimentary basin in Canada  in the 1990s, which is a                                                               
mature basin.   The  elephant days  were over  there in  the '90s                                                               
even though huge  discoveries were found - enough  to support the                                                               
Alliance pipeline construction.                                                                                                 
                                                                                                                                
4:12:21 PM                                                                                                                    
                                                                                                                                
He continued his presentation:                                                                                                  
                                                                                                                                
     I  think  that  a  reasonable expectation  of  profit,  just                                                               
     [indisc.] back briefly to  Spencer Hosie's presentation, the                                                               
     producers under  the lease obligations  are not  entitled to                                                               
     profits.  They  are entitled to a  reasonable expectation of                                                               
     profit  before  going  forward   with  development.    Their                                                               
     obligation is  not only  to develop,  given the  express and                                                               
     implied  covenants.   Their  obligation  is  to develop,  to                                                               
     market, and  to account  to you accurately.   Those  are the                                                               
     three key obligations that they  have.  I believe that there                                                               
     exists, right now today, a  reasonable expectation of profit                                                               
     for going forward in all regards for those producers.                                                                      
                                                                                                                                
4:12:59 PM                                                                                                                    
                                                                                                                                
     Looking at it  from an economic perspective,  you've heard a                                                               
     lot of  talk about - and  you've had IRR -  Internal Rate of                                                               
     Return  thrown at  you throughout  the Centennial  Hall days                                                               
     and here recently and a  lot of confusion over how decisions                                                               
     are made.   I can tell you having sat  at the decision table                                                               
     in collaboration  with other executives  many times,  at the                                                               
     producers'  as  well  as pipeline  end,  there  are  several                                                               
     indicators that  you look at.   IRR is always looked  at and                                                               
     also cash flow is looked at.   Return on capital employed is                                                               
     looked  at,   EBITDA  -   Earnings  Before   Interest  Taxed                                                               
     Depreciation Amortization is looked at.                                                                                    
                                                                                                                                
     But key and number one in  the final analysis is net present                                                               
     worth,  net present  value as  it's  sometimes referred  to.                                                               
     That is king  and Dr. Tony Finizza of Econ  One has told you                                                               
     that.   I've told you that.   think Antony Scott  and others                                                               
     in the Administration  have certainly told you  that and I'd                                                               
     hang on to that because this  issue is going to come around,                                                               
     I believe, for you as these projects roll forward.                                                                         
                                                                                                                                
4:14:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO recalled at Centennial Hall last year that Pedro                                                                 
Van Meurs focused on IRR for days.  He questioned whether that                                                                  
is quite the same value as net present value (NPV).                                                                             
                                                                                                                                
4:14:13 PM                                                                                                                    
                                                                                                                                
MR. HARPER said IRR is a different creature.  Dr. Finizza gave a                                                                
                                                   thth                                                                         
presentation to the  Legislature on either June  14  or June  15                                                                
of  last year  and provided  a full  expose on  IRR.   IRR is  an                                                               
important indicator but  it is not the decision maker.   It never                                                               
has been and is not likely to ever be.                                                                                          
                                                                                                                                
4:14:48 PM                                                                                                                    
                                                                                                                                
MR. HARPER continued his presentation:                                                                                          
                                                                                                                                
     One thing I want  to point out is that -  and there has been                                                               
     confusion and  I keep saying this  - there is no  gas supply                                                               
     commitment required  to construct, expand, have  anything to                                                               
     do today with  a natural gas pipeline in North  America.  In                                                               
     the old days the supply  commitment, when the pipelines were                                                               
     actually buying  all the  gas, was important.   There  is no                                                               
     supply   commitment  anymore.      All   that's  needed   is                                                               
     commitments to  ship and that's  what FT represents.   Those                                                               
     commitments are  typically made  by electric  utilities, gas                                                               
     utilities, marketers, producers and  industrials.  Those are                                                               
     the companies  that typically make  those.  Now  either they                                                               
     have some strong position from  a market perspective or they                                                               
     have some strong position from a supply perspective.                                                                       
                                                                                                                                
     Why they would  take FT varies and I think  you are going to                                                               
     be surprised  once you  get a project  going, and  there are                                                               
     actually subscriptions,  as to who  might show up.   And you                                                               
     will see people taking FT on  a speculative basis as well as                                                               
     a tangible,  concrete basis associated either  with reserves                                                               
     or  with market.   But  just  remember, there  is no  supply                                                               
     commitment required.   They don't have to  step forward with                                                               
     a supply  commitment.  That  pipeline is subscribed,  as Mr.                                                               
     Hobbs  was just  telling you  about -  that's going  to move                                                               
     forward as Mr.  Sparger said.  Once that  happens, you might                                                               
     be surprised how quickly this  pipeline can move forward.  I                                                               
     could not agree with Mr. Sparger's comments more on that.                                                                  
                                                                                                                                
4:16:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  when legislators  were dealing  with                                                               
IRR  and  Net Present  Value,  the  proposal presented  contained                                                               
evaluation terms  for the state to  use on a proposal  on the NPV                                                               
of future cash flow.  He asked Mr.  Harper if he feels that is an                                                               
appropriate measure for legislators to  look at and whether there                                                               
are any others.                                                                                                                 
                                                                                                                                
4:17:07 PM                                                                                                                    
                                                                                                                                
MR. HARPER said  he believes that is the right  thing to look at.                                                               
He suggested that members be up  to speed on IRR, EBITDA and cash                                                               
flow, the relative financial health indicators.                                                                                 
                                                                                                                                
4:17:45 PM                                                                                                                    
                                                                                                                                
MR. HARPER continued his presentation:                                                                                          
                                                                                                                                
     In  my  experience  in  the  roles that  I  have  played  in                                                               
     corporate  life, the  question of  whether to  capitalize FT                                                               
     has always come up.   Firm transportation is a relative part                                                               
     of a local  gas distribution company's business -  is a much                                                               
     bigger part  of their  business than it  is of  a producer's                                                               
     business  because it  is  their  life blood.    It's a  much                                                               
     bigger part  transactionally, commercially  and it's  also a                                                               
     much  bigger expense  item relative  to  the total  business                                                               
     operation.  It also came up at  ARCO, it came up in Canada -                                                               
     my operations  in Canada.   Not once  did we decide  that FT                                                               
     should be capitalized or constitute debt.                                                                                  
                                                                                                                                
     It is  a substantial  obligation - that  is not  to minimize                                                               
     it.  But  I will also tell  you this.  When it  came time to                                                               
     sign an  FT deal, it was  sort of like you  folks here today                                                               
     when the bill was done.   It's a time of celebration.  Gosh,                                                               
     I've  heard this  thing  discussed as  though  oh, my  gosh,                                                               
     we're going to have this FT  thing, it's risky, oh God, it's                                                               
     going to  show up  as a  footnote.   Well, whether  you're a                                                               
     producer or  whether you're a local  distribution company or                                                               
     marketer, if you've got the courage  to step up for FT, it's                                                               
     because  you've got  a really  good  business reason,  which                                                               
     means there's  going to  be a lot  of revenue,  you believe,                                                               
     when it's done.   Mr. Hobbs, I think, did  a terrific job of                                                               
     creating a  very simple example  "snapshotting" today  and I                                                               
     will assure you  when they step up and sign  FT they will be                                                               
     toasting that  evening.   So, don't be  misled by  this dark                                                               
     cloud  that  seems to  represent  FT.   It  represents  real                                                               
     opportunity.                                                                                                               
                                                                                                                                
     As  we said,  here we  have a  situation, mature  downstream                                                               
     infrastructure,  well  developed   and  continuing  to  grow                                                               
     markets -  growing markets, and  we've got a supply.   We've                                                               
     got  enough  reserves  in place  to  initially  support  the                                                               
     construction of  this pipeline  and tremendous  potential to                                                               
     support it and expansions to it long term.                                                                                 
                                                                                                                                
4:19:45 PM                                                                                                                    
                                                                                                                                
     I guess there  [are] other things I could talk  about but in                                                               
     light of  where we are  with the legislation,  Mr. Chairman,                                                               
     at this  time I'll  stop and answer  any questions  that you                                                               
     might have.                                                                                                                
                                                                                                                                
4:19:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if he would comment on McKenzie.                                                                           
                                                                                                                                
4:20:04 PM                                                                                                                    
                                                                                                                                
MR.  HARPER   said  he  could  provide   a  limited  perspective.                                                               
McKenzie is  in a slightly similar  position to Alaska.   Some of                                                               
the same  tension between  some of the  same producers  exists in                                                               
regard to building a pipeline.   In terms of the hydraulics, from                                                               
a  market standpoint,  within the  last three  weeks he  has been                                                               
talking to  Canadians about supply  and market trends  in Canada.                                                               
He is  an advisor to the  Northwest Industrial Gas Users  and the                                                               
Northwest  Power   Planning  Council,   which  is   a  five-state                                                               
commission  appointed by  the governors  to handle  hydro-policy.                                                               
The  western sedimentary  basin decline  rates have  been steeper                                                               
than anticipated,  even with substantial improvements  in current                                                               
gas prices and  long term gas prices.  They  are peddling hard to                                                               
stay even.                                                                                                                      
                                                                                                                                
MR. HARPER pointed out that two  other dynamics are thrown on top                                                               
of that with oil prices  being relatively higher than natural gas                                                               
prices: a movement  to aggressively develop the  oil sands, which                                                               
requires  tremendous amounts  of natural  gas  to be  used as  an                                                               
energy catalyst to  extract from the sands, coupled  with a shift                                                               
in  the infrastructure  in the  U.S.   He  suggested Mr.  Sparger                                                               
address the  committee on that  topic because he was  involved in                                                               
the  Rocky  Mountain Express  project.    He believes  the  Rocky                                                               
Mountain Express will cause a  complete shift in the way physical                                                               
gas moves across America.                                                                                                       
                                                                                                                                
MR.  HARPER further  pointed out  in the  current situation,  the                                                               
Pacific  Northwest and  Canada have  growing  concerns about  the                                                               
physical  availability  of  supply, specifically  widening  basis                                                               
differentials where  they will have  to pay  substantial premiums                                                               
to  attract supply.   In  addition, they  have concerns  that the                                                               
Western Sedimentary basin  gas may be used in  oil sands carrying                                                               
a risk  that the  very large  lines coming out  of the  basin may                                                               
have isolated or  stranded capacity.  The bottom  line is Alaskan                                                               
gas and McKenzie gas are much  more attractive now than they were                                                               
a  year ago  on  a  relative basis.    He  believes the  McKenzie                                                               
project  will  not  compete,  but will  be  complimentary  to  an                                                               
Alaskan project.   He  offered to research  the question  more if                                                               
desired.                                                                                                                        
                                                                                                                                
4:23:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  said a lot  of pipes  from Alberta to  the states                                                               
are not full and Alaska gas  will help put more pressure in those                                                               
lines.                                                                                                                          
                                                                                                                                
4:23:41 PM                                                                                                                    
                                                                                                                                
MR. HARPER  assured members  that regarding  the notion  of price                                                               
effects of  Alaska gas and  McKenzie gas, the  price expectations                                                               
are already factored in.                                                                                                        
                                                                                                                                
4:24:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BUCH  asked Mr.  Harper or one  of the  other team                                                               
members to address the prospects  of LNG, an interstate gas line,                                                               
and the possibility of a Y line.                                                                                                
                                                                                                                                
4:25:30 PM                                                                                                                    
                                                                                                                                
MR. HARPER responded:                                                                                                           
                                                                                                                                
     Thank you - very insightful  and complex questions.  I would                                                               
     say  with regard  to LNG,  LNG from  a world  perspective is                                                               
     going  to become  increasingly important  because there  are                                                               
     certainly more  future hydrocarbons  and methane  than there                                                               
     is apparently  in oil, based on  what we know and  there's a                                                               
     growing trade and it's a  different kind of a market because                                                               
     those cargos  move around depending upon  price signals that                                                               
     are  occurring  real  time  -  a  little  different  than  a                                                               
     pipeline.                                                                                                                  
                                                                                                                                
     What we're seeing  is a great deal of  difficulty in getting                                                               
     ...import  projects  sited.    It's  a  very  slow  process.                                                               
     There's  a   great  push  in   the  Pacific   Northwest  and                                                               
     California right now to get  something done - one, maybe two                                                               
     projects, just one  or two projects to help  with the supply                                                               
     hydraulics.   Do I think  Alaska gas is competing  with LNG?                                                               
     No  I do  not.   Certainly the  more supply  that you  have,                                                               
     relative  to supply  demand  obviously  improves the  supply                                                               
     configuration and  intends to  moderate price  outlooks, the                                                               
     more  that you  have.    But on  the  other  hand, the  more                                                               
     moderated the  price outlook gets,  then the  more energetic                                                               
     you get in terms of looking at future demand.                                                                              
                                                                                                                                
     We're not looking at a static  demand market and this is the                                                               
     problem I had with the argument  a year ago.  You've got LNG                                                               
     and Alaskan  gas that when they  hit the market from  a cost                                                               
     perspective they're not too far  off.  Now Dr. Finizza, Econ                                                               
     One,  will  tell  you  even  in  that  analysis  you're  not                                                               
     competing with  LNG, you're competing with  the highest cost                                                               
     source.   That's the first  one that gets threatened  by new                                                               
     supplies, which  is non-conventional  gas and some  of those                                                               
     things.  That  really is what you're looking at  from a pure                                                               
     economic standpoint.   But I can tell you, the  folks in the                                                               
     Lower  48 states  right  now  are hoping  for  more LNG  and                                                               
     they're hoping this  Alaska gas comes on soon  and the price                                                               
     outlooks now are so robust.  I  think - if I'm not wrong Mr.                                                               
     Scott,  your high  side case  in your  economics was  in the                                                               
     $8.50 range.   We're at $8.00  gas right now.   This was the                                                               
     perfect  storm on  the upside  in his  economics and  in the                                                               
     Econ One models.                                                                                                           
                                                                                                                                
4:27:56 PM                                                                                                                    
                                                                                                                                
     And oh, by the way, I  meant to say earlier that in addition                                                               
     to  Mr.  Hobbs'  work  separately  from  the  Administration                                                               
     group, Econ One who did not  have time or the information to                                                               
     do a full scrub of  the Administration's work, looked at the                                                               
     methodology in the  model, the way FT was  treated, and also                                                               
     endorsed fully the methodology that Mr. Scott used.                                                                        
                                                                                                                                
     But,  anyway, I  hope  I've begun  to  answer your  question                                                               
     anyway.  I don't think  they're mutually exclusive.  I don't                                                               
     think they're directly competitive and  LNG is going to be a                                                               
     bit  slower than  everybody down  there is  hoping for  with                                                               
     these high prices.                                                                                                         
                                                                                                                                
4:28:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO asked  Dr. Scott  to give  the committee  a brief                                                               
comparison of the economics of LNG versus Alaska gas.                                                                           
                                                                                                                                
4:28:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER asked  Mr. Harper  if it  is fair  to say                                                               
that some  people are  "crying in their  beer" given  the current                                                               
possibilities for  Alaska as opposed  to where the state  stood a                                                               
year ago with the proposed contract.                                                                                            
                                                                                                                                
4:29:30 PM                                                                                                                    
                                                                                                                                
MR. HARPER  said certainly.   He  noted there  are good  and well                                                               
meaning legislators  who probably  still view  that as  a logical                                                               
alternative.  He feels certain the  part of the industry that was                                                               
advancing that contract is very disappointed.                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER said  she was referring to  members of the                                                               
industry, not legislators.                                                                                                      
                                                                                                                                
MR.  HARPER said  he has  no doubt  the counter  parties to  that                                                               
Stranded   Gas  Development   Act   (SGDA)   contract  are   very                                                             
disappointed.  He pointed out  they are not denied an opportunity                                                               
to step forward and compete now.   If they want to drive the cost                                                               
down they should  up the ante in the competitive  bidding on this                                                               
pipeline.                                                                                                                       
                                                                                                                                
4:30:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  commented  these presentations  have  been  very                                                               
beneficial to  the committee  and everyone  watching on  Gavel to                                                               
Gavel.   He  thanked all  members.   He noted  while AGIA  passed                                                               
today, it  is just the beginning.   The Legislature will  have to                                                               
choose a  licensee and will  be addressing other  important votes                                                               
in the  future.  He felt  this presentation was just  as valuable                                                               
after the  floor vote as  would have been  before.  He  asked Dr.                                                               
Scott to address  the question about the economics  of LNG versus                                                               
Alaska gas.                                                                                                                     
                                                                                                                                
4:32:19 PM                                                                                                                    
                                                                                                                                
ANTONY  SCOTT, Commercial  Section, Central  Office, Division  of                                                               
Oil & Gas, Department of Natural  Resources (DNR), said he is not                                                               
an expert on LNG.  He  asserted that discussions about LNG coming                                                               
and the  window of opportunity  for Alaska gas closing  have been                                                               
considerable.   ConocoPhillips'  CEO  recently  said LNG,  Alaska                                                               
gas, and McKenzie  gas are all needed.  North  American supply is                                                               
having a hard  time keeping up.  Most of  the inexpensive gas has                                                               
been produced  so what sets prices  in North America will  be the                                                               
marginal cost of  supply, that being the most expensive  gas.  He                                                               
noted  that LNG  displaces  that a  little bit,  but  not a  lot.                                                               
Although LNG will affect the price  in North America, it will not                                                               
set the price.   It is clear there is plenty of  room for LNG and                                                               
Alaskan gas given North American demand.                                                                                        
                                                                                                                                
4:33:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO asked,  if [Alaska  gas]  would still  be a  good                                                               
project if,  in a worst case  scenario, tons of LNG  are produced                                                               
and new terminals are built.                                                                                                    
                                                                                                                                
4:34:04 PM                                                                                                                    
                                                                                                                                
MR. HARPER told members:                                                                                                        
                                                                                                                                
     I can tell you  that we at Econ One have  looked at this and                                                               
     we do  not see a scenario  where it's still a  good project.                                                               
     What you can  see is a re-ordering of the  way product moved                                                               
     around in  the U.S., depending  upon where these  things are                                                               
     sited and how they come  in, which may ultimately affect the                                                               
     downstream  movement of  Alaskan  gas but  from an  economic                                                               
     impact standpoint,  and the economics of  this project given                                                               
     the upside  case the  downside case  and expected  case that                                                               
     your   consultants  at   Econ   One  have   run,  that   the                                                               
     Administration has run and others  in the industry have run,                                                               
     we haven't seen  a scenario where it doesn't work.   And Mr.                                                               
     Hobbs  did his  work here  for you  today.   We don't  see a                                                               
     scenario at this time - not  that one couldn't exist, but we                                                               
     haven't seen one.                                                                                                          
                                                                                                                                
4:34:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  referred to an  article he read  that said                                                               
LNG would  not come  on at  the anticipated  rate because  of the                                                               
high cost of  projects and that several in Qatar  had been put on                                                               
hold.   He  asked if  the  perception is  that not  only are  the                                                               
loading  points  unavailable, but  that  LNG  supplies are  short                                                               
because of increased demand.                                                                                                    
                                                                                                                                
4:35:46 PM                                                                                                                    
                                                                                                                                
MR. HARPER asserted he does not  have a good understanding of LNG                                                               
on  the upstream  side.   He  reiterated that  on the  downstream                                                               
side, the siting of these  [facilities] has become very difficult                                                               
because of local resistance.  When  it comes in it actually has a                                                               
quality problem  because it  is so  incredibly dry.   The  AGA is                                                               
looking  at  quality  specification  issues  right  now.    Local                                                               
distribution companies  are looking at piping  infrastructure and                                                               
other changes  that will  need to  be made.   Those  changes will                                                               
occur over  time but he believes  LNG will be slower  rather than                                                               
faster  in arriving  here than  what  was projected  a year  ago.                                                               
However,  over  the next  50  years,  LNG  will  be huge  so  its                                                               
development should be encouraged.                                                                                               
                                                                                                                                
4:36:53 PM                                                                                                                    
                                                                                                                                
MR. HOBBS  added that everything else  being equal, it is  in the                                                               
United States' long term strategic  interest to get this pipeline                                                               
built, which  is the  reason for the  federal loan  guarantee and                                                               
other federal support.  This gas  will be sold to U.S. consumers.                                                               
LNG can  be sourced in many  places in the world  and many issues                                                               
could  arise  that may  effect  that,  sometimes purely  economic                                                               
because, for example, Japan might want  more than the U. S. does.                                                               
He concluded, "Everything else being  equal, Alaska gas will beat                                                               
out  LNG but  obviously  it's  going to  have  to  compete on  an                                                               
economic front as well."                                                                                                        
                                                                                                                                
CO-CHAIR  GATTO  said he  appreciates  the  "second opinion"  the                                                               
presenters are providing.                                                                                                       
                                                                                                                                
4:38:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said his  question has to  do with  one of                                                               
the provisions in the contract  about the evaluation terms number                                                               
6 (page 12 of the work draft).  He continued:                                                                                   
                                                                                                                                
     This is  evaluating the  Net Present Value  and then  it was                                                               
     other factors found  by the commissioners to  be relevant to                                                               
     the evaluation of  the Net Present Value  of the anticipated                                                               
     cash flow to the state.                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that  provision is different than the                                                               
wording used in the House Resources version.  He furthered:                                                                     
                                                                                                                                
     I was wanting to see if we  could get Mr. Shepler to give us                                                               
     some evaluation  of that  as far  as with  FERC and  also we                                                               
     have - you know one of the  reasons we put this in there was                                                               
     because we had  one of the proposals coming  forward doing a                                                               
     profit  share  system with  us  that  was a  Port  Authority                                                               
     proposal.  It  was talking about several things.   One was a                                                               
     PILT, payment in lieu of taxes,  for the property tax on the                                                               
     pipeline,  a   payment  in  lieu   of  taxes   possibly  for                                                               
     offsetting  corporate   taxes  because  of  course   it's  a                                                               
     municipal entity  so it wouldn't  pay corporate taxes.   The                                                               
     third thing that  we had considered or  that we incorporated                                                               
     in  the language  was a  direct  contractual profit  sharing                                                               
     with the State  of Alaska of the profits.   I'm wondering if                                                               
     we could have him address those issues.                                                                                    
                                                                                                                                
4:39:51 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER said despite his  commitment to Representative Seaton                                                               
he was  unable to  corral the Commissioner  of Revenue  to assure                                                               
that his answer was consistent  with one the commissioner gave in                                                               
testimony.  Evaluation factor number 6  is one of the factors the                                                               
commissioners will consider when  evaluating competing bids under                                                               
the AGIA  process.   He read, "Will  be economic  value resulting                                                               
from payments  required to be made  to the state under  the terms                                                               
of the  proposal."  It goes  to the Port Authority's  project but                                                               
could apply  to other  projects in  the context  of a  payment in                                                               
lieu of  taxes or  profit sharing.   If one  project is  going to                                                               
give  the  state  more  value  in some  form,  the  state  should                                                               
recognize that.                                                                                                                 
                                                                                                                                
MR. SHEPLER  explained that  comes up in  several contexts.   One                                                               
was  the notion  that one  way the  state could  receive economic                                                               
value might  be in  the form  of an  applicant offering  to repay                                                               
part of the  $500 million over time.  Another  was the concept of                                                               
a payment  in lieu of  taxes or  profit sharing.   Obviously, the                                                               
more  elevated the  value to  the state,  the more  elevated that                                                               
project proposal would become.   However, one issue does surface,                                                               
that being  whether the  payment to  the state  is coming  on the                                                               
back of  the shippers.   If, as  a result of  the payment  to the                                                               
state, the  rates or the project  for the shippers goes  up, that                                                               
will have an  offsetting negative value to the  state because the                                                               
netback to the state will be  reduced.  His perception is that if                                                               
the  economic  value  is actually  coming  from  the  applicant's                                                               
pocket  that  would  be  a  positive  factor  in  the  evaluation                                                               
process.   If  it  is coming  from the  shipper's  pocket or  the                                                               
state's pocket, that would offset the economic value.                                                                           
                                                                                                                                
MR. SHEPLER stated in the  context of the Port Authority agreeing                                                               
to  give half  of  its  equity return,  which  it  is allowed  to                                                               
recover in  the rate making process,  to the state that  would be                                                               
one thing.   However, if  the Port Authority proposes  to collect                                                               
money  from shippers  for payment  in lieu  of taxes,  which they                                                               
would  charge  the  customers  for,  that  would  be  problematic                                                               
because it would  raise and lower the benefits to  the state.  He                                                               
added  whether  FERC  would  even allow  the  Port  Authority  to                                                               
collect  rates  that  reflect  costs, the  PILT,  that  the  Port                                                               
Authority  is  agreeing to  make  but  not  required to  make  is                                                               
questionable.   It's almost as  if the Port Authority  is allowed                                                               
to recover  costs it  is not  incurring.  He  opined that  such a                                                               
proposal  would have  to  be  evaluated on  the  totality of  the                                                               
economic  value -  whether the  applicant  is contributing  value                                                               
from its  pocket or whether  it is contributing value  by raising                                                               
rates.                                                                                                                          
                                                                                                                                
4:44:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON recalled  the commissioner  stated in  the                                                               
House  Finance Committee  that  it wouldn't  be  countered if  it                                                               
could be  charged to the  shipper or increased a  tariff; however                                                               
he doesn't see anything in the language that says that.                                                                         
                                                                                                                                
4:45:27 PM                                                                                                                    
                                                                                                                                
MR.  SHEPLER replied  AGIA requires  that the  $500 million  must                                                               
come from the rate base, which  has a rate reducing effect at the                                                               
outset.  He thought Commissioner  Galvin was saying the effect of                                                               
the consideration written into the law  is that if it is going to                                                               
raise the  shipper's rates,  consumers' rates  will rise  so that                                                               
will not count.  If it  does not raise customers' rates but gives                                                               
the state more value that would  be recognized as a value for the                                                               
state.                                                                                                                          
                                                                                                                                
4:46:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said he  is trying  to make  sure everyone                                                               
who  is  thinking about  submitting  a  proposal understands  the                                                               
situation.  He  gave the following illustration and  asked for an                                                               
analysis: an entity  has a 20 mil property tax,  which would be a                                                               
cost that  goes into the  tariff.  However,  if that entity  is a                                                               
tax exempt  municipality, that would  not go  into the rate.   He                                                               
said in one  case, the 20 mils  would not come to the  state as a                                                               
property tax payment but it would  lower the tariff.  He said the                                                               
20 mils is a positive in that  it lowers the tariff but the state                                                               
does not receive any of the 20 mils.                                                                                            
                                                                                                                                
4:48:40 PM                                                                                                                    
                                                                                                                                
MR. HARPER deferred to Dr.  Scott but added AGIA contemplates the                                                               
RFP  process, so  to the  extent something  was unclear,  the RFP                                                               
would focus on that.                                                                                                            
                                                                                                                                
4:49:04 PM                                                                                                                    
                                                                                                                                
DR. SCOTT  gave the following  example to illustrate  the concept                                                               
brought forward  by Representative Seaton.   Assume the effective                                                               
tax rate on gas is roughly  comparable to oil, 12.5 percent.  The                                                               
royalty is typically  about 12.5 percent.  That  puts the state's                                                               
value in terms  of the flow of  gas at 25 percent.   If the costs                                                               
on the  project are reduced by  $1, the state receives  a quarter                                                               
of that.   If local property  taxes are $100 million  less on the                                                               
project, then  the state receives  a $25 million  benefit through                                                               
the tariffs  and the netback in  terms of looking at  royalty and                                                               
production   tax   revenues.      He   acknowledged   the   point                                                               
Representative  Seaton  raised  is  important  in  terms  of  the                                                               
potential  of  a  municipally owned  project,  which  commits  to                                                               
providing  payments  in lieu  of  tax  but  is not  required  to.                                                               
Assuming  the  municipality  is FERC  regulated,  whether  it  is                                                               
permitted  to  flow  those  costs   through  to  rate  payers  is                                                               
something the  state would have to  take a hard look  at in terms                                                               
of the likelihood of the promised cash flow.                                                                                    
                                                                                                                                
4:51:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  felt it is  very important to  think about                                                               
these things and  address them before proposals  are solicited so                                                               
that potential applicants  know how value will be  evaluated.  He                                                               
said  it  is  likely  the  state will  receive  a  bid  from  one                                                               
municipality  so  the discussion  may  be  characterized by  that                                                               
municipality.   However, it is similar  to the $500 million.   If                                                               
an entity decides to increase its  benefit to the state by saying                                                               
it will pay that back, the  $500 million could not be included in                                                               
its equity.  He felt the language  in number 6 is not as clear as                                                               
the language inserted by the House Resources Standing Committee.                                                                
                                                                                                                                
4:53:45 PM                                                                                                                    
                                                                                                                                
DR.  SCOTT  said  it  is incumbent  upon  the  Administration  to                                                               
explain how all of the  different situations will be evaluated in                                                               
very clear  terms in the  Request For Applications (RFA)  so that                                                               
it is completely transparent.                                                                                                   
                                                                                                                                
4:54:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO thanked all participants.                                                                                        
                                                                                                                                
4:54:05 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 4:54 p.m.                                                                 

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