Legislature(2007 - 2008)BARNES 124

04/20/2007 01:00 PM RESOURCES


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Audio Topic
01:07:26 PM Start
01:07:34 PM HB177
03:33:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 4/21 at 1:00 pm --
+= HB 177 NATURAL GAS PIPELINE PROJECT TELECONFERENCED
Heard & Held
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         April 20, 2007                                                                                         
                           1:07 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Carl Gatto, Co-Chair                                                                                             
Representative Craig Johnson, Co-Chair                                                                                          
Representative Bob Roses                                                                                                        
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Vic Kohring                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 177                                                                                                              
"An  Act   relating  to  the   Alaska  Gasline   Inducement  Act;                                                               
establishing   the  Alaska   Gasline   Inducement  Act   matching                                                               
contribution  fund; providing  for an  Alaska Gasline  Inducement                                                               
Act coordinator; making conforming  amendments; and providing for                                                               
an effective date."                                                                                                             
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 177                                                                                                                  
SHORT TITLE: NATURAL GAS PIPELINE PROJECT                                                                                       
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
03/05/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/05/07       (H)       O&G, RES, FIN                                                                                          
03/06/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/06/07       (H)       -- MEETING CANCELED --                                                                                 
03/08/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/08/07       (H)       -- MEETING CANCELED --                                                                                 
03/13/07       (H)       O&G AT 3:30 PM HOUSE FINANCE 519                                                                       
03/13/07       (H)       Heard & Held                                                                                           
03/13/07       (H)       MINUTE(O&G)                                                                                            
03/15/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/15/07       (H)       Heard & Held                                                                                           
03/15/07       (H)       MINUTE(O&G)                                                                                            
03/19/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/19/07       (H)       Heard & Held                                                                                           
03/19/07       (H)       MINUTE(O&G)                                                                                            
03/20/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/20/07       (H)       Heard & Held                                                                                           
03/20/07       (H)       MINUTE(O&G)                                                                                            
03/21/07       (H)       O&G AT 5:30 PM SENATE FINANCE 532                                                                      
03/21/07       (H)       Heard & Held                                                                                           
03/21/07       (H)       MINUTE(O&G)                                                                                            
03/22/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/22/07       (H)       Heard & Held                                                                                           
03/22/07       (H)       MINUTE(O&G)                                                                                            
03/23/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/23/07       (H)       Heard & Held                                                                                           
03/23/07       (H)       MINUTE(O&G)                                                                                            
03/24/07       (H)       O&G AT 1:00 PM SENATE FINANCE 532                                                                      
03/24/07       (H)       -- Public Testimony --                                                                                 
03/26/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/26/07       (H)       Heard & Held                                                                                           
03/26/07       (H)       MINUTE(O&G)                                                                                            
03/27/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/28/07       (H)       O&G AT 7:30 AM CAPITOL 106                                                                             
03/28/07       (H)       Heard & Held                                                                                           
03/28/07       (H)       MINUTE(O&G)                                                                                            
03/28/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/28/07       (H)       Heard & Held                                                                                           
03/28/07       (H)       MINUTE(O&G)                                                                                            
03/29/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/29/07       (H)       Heard & Held                                                                                           
03/29/07       (H)       MINUTE(O&G)                                                                                            
03/30/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/30/07       (H)       Heard & Held                                                                                           
03/30/07       (H)       MINUTE(O&G)                                                                                            
03/31/07       (H)       O&G AT 1:00 PM BARNES 124                                                                              
03/31/07       (H)       -- MEETING CANCELED --                                                                                 
04/02/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
04/02/07       (H)       Heard & Held                                                                                           
04/02/07       (H)       MINUTE(O&G)                                                                                            
04/03/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
04/03/07       (H)       Moved CSHB 177(O&G) Out of Committee                                                                   
04/03/07       (H)       MINUTE(O&G)                                                                                            
04/04/07       (H)       O&G RPT CS(O&G) NT 3DP 2NR 2AM                                                                         
04/04/07       (H)       DP: RAMRAS, DOOGAN, OLSON                                                                              
04/04/07       (H)       NR: SAMUELS, KAWASAKI                                                                                  
04/04/07       (H)       AM: DAHLSTROM, KOHRING                                                                                 
04/04/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
04/04/07       (H)       -- MEETING CANCELED --                                                                                 
04/05/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
04/05/07       (H)       -- MEETING CANCELED --                                                                                 
04/10/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/10/07       (H)       Heard & Held                                                                                           
04/10/07       (H)       MINUTE(RES)                                                                                            
04/11/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/11/07       (H)       Heard & Held                                                                                           
04/11/07       (H)       MINUTE(RES)                                                                                            
04/12/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/12/07       (H)       Heard & Held                                                                                           
04/12/07       (H)       MINUTE(RES)                                                                                            
04/13/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/13/07       (H)       Heard & Held                                                                                           
04/13/07       (H)       MINUTE(RES)                                                                                            
04/14/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/14/07       (H)       Heard & Held                                                                                           
04/14/07       (H)       MINUTE(RES)                                                                                            
04/16/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/16/07       (H)       Heard & Held                                                                                           
04/16/07       (H)       MINUTE(RES)                                                                                            
04/17/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/17/07       (H)       Heard & Held                                                                                           
04/17/07       (H)       MINUTE(RES)                                                                                            
04/18/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/18/07       (H)       Heard & Held                                                                                           
04/18/07       (H)       MINUTE(RES)                                                                                            
04/19/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
04/19/07       (H)       Heard & Held                                                                                           
04/19/07       (H)       MINUTE(RES)                                                                                            
04/20/07       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JOHN KATZ, Deputy Associate General Counsel for Energy Projects                                                                 
Federal Energy Regulatory Commission                                                                                            
Department of Energy                                                                                                            
Washington, DC                                                                                                                  
POSITION STATEMENT: Provided a brief overview of the Federal                                                                  
Energy Regulatory Commission and answered questions.                                                                            
                                                                                                                                
JACQUELINE HOLMES, Associate General Counsel for Energy Projects                                                                
Federal Energy Regulatory Commission                                                                                            
Department of Energy                                                                                                            
Washington, DC                                                                                                                  
POSITION   STATEMENT:  During   hearing  of   HB  177,   answered                                                             
questions.                                                                                                                      
                                                                                                                                
DONALD SHEPLER, Attorney at Law                                                                                                 
Greenberg Traurig, LLP;                                                                                                         
Washington, DC                                                                                                                  
POSITION  STATEMENT: Provided  a  presentation on  behalf of  the                                                             
Palin-Parnell  Administration  regarding  issues related  to  the                                                               
Federal Energy Regulatory Commission.                                                                                           
                                                                                                                                
PAT GALVIN, Commissioner                                                                                                        
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT: During  hearing of  CSHB 177(O&G),  answered                                                             
questions.                                                                                                                      
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  CARL   GATTO  called   the  House   Resources  Standing                                                             
Committee  meeting  to  order at  1:07:26  PM.    Representatives                                                             
Gatto, Johnson, Edgmon, Kawasaki,  Seaton, and Roses were present                                                               
at  the call  to  order.   Representative  Guttenberg and  Wilson                                                               
arrived as the meeting was in progress.                                                                                         
                                                                                                                                
HB 177-NATURAL GAS PIPELINE PROJECT                                                                                           
                                                                                                                                
1:07:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  announced that the  only order of  business would                                                               
be HOUSE  BILL NO. 177,  "An Act  relating to the  Alaska Gasline                                                               
Inducement Act;  establishing the  Alaska Gasline  Inducement Act                                                               
matching  contribution  fund;  providing for  an  Alaska  Gasline                                                               
Inducement  Act coordinator;  making  conforming amendments;  and                                                               
providing  for an  effective date."   [Before  the committee  was                                                               
CSHB 177(O&G).]                                                                                                                 
                                                                                                                                
1:08:51 PM                                                                                                                    
                                                                                                                                
JOHN KATZ, Deputy Associate General  Counsel for Energy Projects,                                                               
Federal  Energy  Regulatory  Commission,  Department  of  Energy,                                                               
explained   that  FERC   consists   of  five   members  who   are                                                               
representatives of FERC appointed by  the President of the United                                                               
States.   He further  explained that  the comments  of commission                                                               
staff  are  that  individual's   opinion  and  don't  necessarily                                                               
reflect the  opinion of FERC  or any  of its commissioners.   The                                                               
FERC  is a  deliberative body  that officially  speaks through  a                                                               
majority vote.   However, the chair of FERC  has authorized staff                                                               
to  speak to  the committee  and provide  as much  information as                                                               
possible.   Mr. Katz  pointed out that  FERC is  authorized under                                                               
the  Natural  Gas  Act  to  certificate  interstate  natural  gas                                                               
pipelines.   He also pointed  out that  a few years  ago Congress                                                               
passed the  Alaska Natural Gas  Pipeline Act, which  created some                                                               
special  provisions with  regard  to an  interstate pipeline  and                                                               
included  some  provisions  that  would  make  FERC's  work  more                                                               
expeditious and efficient.  The  aforementioned Act also included                                                               
provisions   related   to   other  federal   agencies   and   the                                                               
coordination that  would occur.   In fact,  the Act  provided for                                                               
the establishment  of an office  of a federal  coordinator, which                                                               
was  filled by  former  Alaska  Senator Drue  Pearce.   The  FERC                                                               
essentially stands ready to process  an application for an Alaska                                                               
natural gas project  as soon as such a project  is put before it.                                                               
He noted  that FERC has worked  with some of its  sister agencies                                                               
to  prepare for  that day,  but  FERC is  essentially a  reactive                                                               
agency and doesn't  have authority to impose  requirements in the                                                               
abstract.                                                                                                                       
                                                                                                                                
1:12:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked if  Mr. Katz  has any  thoughts as  to when                                                               
such a project will arrive.                                                                                                     
                                                                                                                                
MR. KATZ replied  no, adding that no one has  told FERC that they                                                               
are  preparing an  application.   He  reiterated that  FERC is  a                                                               
reactive agency  and must wait  for an application before  it can                                                               
start the process.                                                                                                              
                                                                                                                                
1:13:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON directed  attention to  the expansions  in                                                               
Section 7 of  CSHB 177(O&G), which requires the  main line entity                                                               
to propose  and support recovery  of all expansion  costs through                                                               
rolled-in rates  by not  more than 15  percent above  the initial                                                               
maximum  recourse rates.    Some contend  that  such a  provision                                                               
supplants or defines what a subsidy  is.  However, he opined that                                                               
FERC will  review the facts at  the time and determine  whether a                                                               
subsidy exists or  not.  Representative Seaton asked  if Mr. Katz                                                               
is concerned  that the proposed language  presupposes and defines                                                               
for FERC what a subsidy is.                                                                                                     
                                                                                                                                
MR.  KATZ replied  no  because FERC  will have  to  make its  own                                                               
decision as to  whether there's an improper subsidy.   The FERC's                                                               
2005  and   2005A  orders,  which   addressed  the   open  season                                                               
regulations for  an Alaska gas  project, indicate  that generally                                                               
an Alaska  project might be  considered different because  of the                                                               
nature of competition  in Alaska and the large expense  of such a                                                               
project.   Therefore, FERC established a  presumption for rolled-                                                               
in  rates specifying  that it  would review  whether there  was a                                                               
subsidy  by  existing  shippers of  new  shippers  by  expansion.                                                               
However, FERC  didn't define what a  subsidy would be.   In fact,                                                               
FERC said that  an increase in rates might not  be a subsidy, but                                                               
that such couldn't be determined  until the facts of the specific                                                               
case were known.  Therefore,  if the legislature chooses to offer                                                               
an  inducement   to  a   prospective  pipeline   applicant,  that                                                               
applicant is free  to accept or not accept that  inducement.  The                                                               
FERC will then  review the facts and determine  whether there's a                                                               
subsidy or  not.   Mr. Katz  said that he  didn't know  what FERC                                                               
would  do  with respect  to  an  [application] that  discussed  a                                                               
future expansion.                                                                                                               
                                                                                                                                
1:16:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON surmised  then that  Mr. Katz  didn't view                                                               
the  provision that  specifies that  the mainline  entity has  to                                                               
make the  proposal up  to 15 percent  above the  initial recourse                                                               
rates as defining a subsidy.                                                                                                    
                                                                                                                                
MR. KATZ  noted his agreement with  Representative Seaton, adding                                                               
that  the  legislature  can't bind  FERC,  which  operates  under                                                               
federal law.  He  said that it will be up  to those going through                                                               
the Alaska  process with  regard to whether  they want  to accept                                                               
the state's inducements  or not.  The aforementioned  is a matter                                                               
between the state and those pipeline proponents.                                                                                
                                                                                                                                
1:18:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  recalled   testimony  that  the  mainline                                                               
entity itself  should be  able to determine  whether there  was a                                                               
subsidy  or  not.   However,  Representative  Seaton related  his                                                               
understanding  that  FERC would  make  that  determination and  a                                                               
pipeline entity may  not view the facts and  circumstances in the                                                               
same  manner   as  FERC.     He  asked   if  that's   Mr.  Katz's                                                               
understanding also.                                                                                                             
                                                                                                                                
MR. KATZ replied  yes.  However, he acknowledged  that a pipeline                                                               
proponent  could  make  a  case  before FERC  as  to  whether  it                                                               
believes  a  subsidy  will  or   will  not  occur  in  any  given                                                               
situation.   Still, FERC  would make it's  own decision  based on                                                               
statements by anyone interested in the case.                                                                                    
                                                                                                                                
1:19:17 PM                                                                                                                    
                                                                                                                                
MR.  KATZ, in  response to  Representative Guttenberg,  said that                                                               
it's  difficult to  provide examples  when FERC  determined there                                                               
was a subsidy and when there  wasn't.  The difficulty lays in the                                                               
2005  and  2005A  orders,  which held  open  the  possibility  of                                                               
reviewing an Alaska  project differently than that of  a Lower 48                                                               
project based on the facts of the case.                                                                                         
                                                                                                                                
1:20:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG  surmised  then  that  this  issue  is                                                               
without precedence  and that FERC  will address matters  based on                                                               
the facts at the time and won't look back on other precedence.                                                                  
                                                                                                                                
MR.  KATZ  answered  that the  commission  might  use  precedent.                                                               
However,  the aforementioned  open  season  regulation orders  of                                                               
FERC recognize that  an Alaska project would be  different than a                                                               
project in  the Lower 48.   For instance, most expect  that there                                                               
will  be  one pipeline  and  thus  there  won't be  "pipeline  on                                                               
pipeline  competition" and  thus  production in  Alaska may  only                                                               
have one pipeline that it  can travel.  Furthermore, the expenses                                                               
of an Alaska pipeline will dwarf  those of any other project.  He                                                               
noted  that a  Lower 48  standard is  one in  which FERC  doesn't                                                               
allow a  rate increase  to existing  shippers that  don't receive                                                               
benefits,  which FERC  orders 2005  and 2005A  specify might  not                                                               
apply to an Alaska project.                                                                                                     
                                                                                                                                
1:21:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked if there are  any other examples                                                               
in  the FERC  orders  that  specify whether  the  rates and  open                                                               
seasons are significantly different as well.                                                                                    
                                                                                                                                
MR.   KATZ  said,   "Not  really,   no."     He  reiterated   his                                                               
understanding  that the  [FERC] commissioner  recognized that  an                                                               
Alaska project would be unique.                                                                                                 
                                                                                                                                
1:22:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked if a similar  situation occurred                                                               
in the early 1970s with the Trans-Alaska Pipeline System (TAPS).                                                                
                                                                                                                                
MR.  KATZ said  that he  isn't familiar  with the  ratemaking for                                                               
TAPS.  However, he noted that  the oil rate regime isn't the same                                                               
as the gas rate regime and thus he said he couldn't answer.                                                                     
                                                                                                                                
1:22:49 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  inquired as  to the  difference in  how expansion                                                               
rates are treated in the contiguous U.S. versus Canada.                                                                         
                                                                                                                                
MR.  KATZ, noting  that he's  not  an expert  in Canadian  rates,                                                               
related his  understanding that TransCanada has  testified before                                                               
the  committee that  rolled-in rates  apply  either way,  whether                                                               
they  increase or  decrease rates  in an  expansion.   Typically,                                                               
FERC  is only  concerned  whether subsidies  will occur,  whether                                                               
rates will  increase.  If,  through an expansion,  rates lowered,                                                               
then  FERC would  require that  to be  rolled-in for  a Lower  48                                                               
pipeline.   He  opined that  there's a  presumption for  Lower 48                                                               
pipelines  that   if  existing  shippers  have   paid  for  cheap                                                               
expansibility, they  shouldn't be  deprived of  that and  the new                                                               
shippers shouldn't  come on and  pay for all the  mainline costs.                                                               
Furthermore, in  the Lower 48 if  the rates are lower  through an                                                               
expansion, those  benefits would  go to  all shippers  whereas if                                                               
the rates increased,  those costs would be paid  by the expansion                                                               
shippers.   He  noted  that although  the  aforementioned is  the                                                               
basic presumption under which FERC  operates, parties could agree                                                               
to something else.                                                                                                              
                                                                                                                                
1:24:40 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO then  invited an  explanation  of the  difference                                                               
between incremental rates of the  contiguous U.S. versus Alaska's                                                               
rolled-in rates.                                                                                                                
                                                                                                                                
MR. KATZ  explained that typically  an incremental rate  would be                                                               
applied  in the  U.S.  if, for  example,  there were  significant                                                               
costs  associated with  adding capacity  and the  only benefiting                                                               
entities  were a  small class  of shippers,  or one  shipper that                                                               
would become  a new  shipper on  the pipeline.   If the  costs of                                                               
those  additional facilities,  if rolled-in,  would result  in an                                                               
increase  in rates  to existing  shippers, FERC  would point  out                                                               
that the  existing shippers  have a contract  and an  agreed upon                                                               
rate and shouldn't have to pay  higher costs in order to bring on                                                               
a new shipper.   In further response to Co-Chair  Gatto, Mr. Katz                                                               
said that  it's standard operating  procedure in the Lower  48 to                                                               
be  incremental only  if  the costs  would  increase to  existing                                                               
shippers.   However,  if the  costs for  existing shippers  would                                                               
remain the  same or  be lowered  as a  result of  expansion, then                                                               
those  rates  are rolled-in.    He  noted  that often  there  are                                                               
proceedings in which new facilities  are rolled-in, and therefore                                                               
the standard operating  procedure depends upon the  features of a                                                               
proposed expansion and the costs.                                                                                               
                                                                                                                                
CO-CHAIR GATTO  asked if [FERC]  makes all the  determinations on                                                               
that  matter  or  is  there  a contract  prior  to  entering  the                                                               
discussion.                                                                                                                     
                                                                                                                                
1:26:22 PM                                                                                                                    
                                                                                                                                
MR. KATZ said that there may be contracts.                                                                                      
                                                                                                                                
JACQUELINE   HOLMES,  Associate   General   Counsel  for   Energy                                                               
Projects,  Federal Energy  Regulatory  Commission, Department  of                                                               
Energy,  interjected that  FERC would  make the  determination on                                                               
the tariff recourse rate, although  companies may have negotiated                                                               
rates with particular  customers that would call  for a different                                                               
rate  than the  recourse rate.    Ms. Holmes  specified that  the                                                               
recourse rate  would be incremental  if the cost would  be higher                                                               
to existing  customers and rolled-in  if the cost would  be lower                                                               
to existing customers.                                                                                                          
                                                                                                                                
1:27:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON referred  to Section  6 of  CSHB 177(O&G),                                                               
which  requires expansion  in reasonable  engineering increments.                                                               
He asked if those are parameters that FERC usually has.                                                                         
                                                                                                                                
MR. KATZ said that he  doesn't believe FERC specifically includes                                                               
those  type  of parameters.    However,  FERC reviews  whether  a                                                               
proposed  expansion is  in the  public interest  and performs  an                                                               
engineering analysis.   Therefore, Mr. Katz  indicated that there                                                               
may  not  be  a  large  difference between  [Section  6  of  CSHB                                                               
177(O&G)]  and  the  aforementioned   FERC  review.    If  FERC's                                                               
engineers  found  that  an  expansion  was  very  inefficient  in                                                               
engineering or  environmental terms, FERC may  require changes in                                                               
the  proposal   to  make  it   reasonable  from   an  engineering                                                               
perspective.   He  related that  FERC's policy  for the  price of                                                               
expansion in the Lower 48 is left to the market to decide.                                                                      
                                                                                                                                
1:28:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON  requested an  explanation of  negotiated rates.                                                               
He then posed  a situation in which negotiated rates  turn out to                                                               
be a  subsidy and  asked if  FERC has the  ability to  address or                                                               
change those negotiated rates.                                                                                                  
                                                                                                                                
1:29:26 PM                                                                                                                    
                                                                                                                                
MR. KATZ  said that  FERC would  listen to the  pros and  cons of                                                               
expansion rates and make a  decision as to whether the negotiated                                                               
rates are reasonable.                                                                                                           
                                                                                                                                
MS. HOLMES  interjected that in  a rate case, although  a company                                                               
may have  negotiated a rate  with shippers, FERC would  treat the                                                               
volumes under the negotiated rate  as though they were paying the                                                               
maximum recourse  rate.   The difference would  likely go  to the                                                               
company rather than to the shippers, she opined.                                                                                
                                                                                                                                
1:30:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON  asked whether FERC  gets involved with  rate of                                                               
returns on pipelines.                                                                                                           
                                                                                                                                
MR. KATZ  replied yes.   He said that when  there is a  full rate                                                               
case before FERC  it reviews [the rate of return]  along with the                                                               
other costs.   He mentioned that sometimes  the aforementioned is                                                               
controversial.                                                                                                                  
                                                                                                                                
1:31:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON surmised then that  FERC probably has an average                                                               
rate of return for a pipeline.                                                                                                  
                                                                                                                                
MS. HOLMES related  her belief that currently  for new pipelines,                                                               
the average  return on equity that  FERC will grant is  13.5 - 14                                                               
percent   In  further response  to Co-Chair  Johnson, Ms.  Holmes                                                               
said  that  she didn't  know  the  average  return on  equity  in                                                               
Canada.                                                                                                                         
                                                                                                                                
MR. KATZ opined  that with FERC recognizing the  unique nature of                                                               
an Alaska  project, a pipeline  proponent may argue for  a higher                                                               
return due to the risk while  others may argue for a lower return                                                               
because there won't be any competition.                                                                                         
                                                                                                                                
1:32:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked if Mr.  Katz viewed the Alaska  pipeline as                                                               
risky.                                                                                                                          
                                                                                                                                
MR. KATZ  said that it  depends.  If  there's a pipeline  that is                                                               
fully subscribed,  then [the  state] is  probably in  good shape.                                                               
He didn't doubt that there is  a market for an Alaska pipeline or                                                               
that  there  would  be  customers  for  the  gas.    Furthermore,                                                               
Congress  directed FERC  to  assume  that there's  a  need for  a                                                               
pipeline.  However, Mr. Katz  opined that it would be exceedingly                                                               
risky  for an  entity to  move  forward on  the pipeline  without                                                               
contracts.   Still, it  remains difficult to  pen down  where the                                                               
Alaska  pipeline   falls  on  the  risk   spectrum  without  more                                                               
knowledge of a specific proposal.                                                                                               
                                                                                                                                
1:34:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  asked whether it's  common or uncommon  for there                                                               
to be  proven reserves when  a pipeline is built,  although there                                                               
is no agreement to place those reserves in the pipeline.                                                                        
                                                                                                                                
MR. KATZ specified that it's more  typical for a pipeline to have                                                               
the contracts in  hand prior to building, although  that's not an                                                               
absolute  requirement.   He related  that [FERC  staff] view  the                                                               
possibility of  a pipeline being  built as increasing  along with                                                               
the  amount  of  contracts  the pipeline  proponent  is  able  to                                                               
secure.                                                                                                                         
                                                                                                                                
1:35:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG inquired as to  how a failed first open                                                               
season would be perceived by FERC and those in Washington, D.C.                                                                 
                                                                                                                                
MR. KATZ opined  that there would be some  disappointment in that                                                               
[those in Washington,  D.C.] have perceived an  Alaska project as                                                               
crucial to America's  energy future.  However, if  the first open                                                               
season doesn't succeed, it doesn't mean  the project is gone.  In                                                               
fact, it's  possible that a  proponent could hold an  open season                                                               
and proposed shippers were unhappy  with the terms offered or the                                                               
size of  the pipeline.   Still, there's  no reason that  the same                                                               
proponent couldn't  change its  proposal and  be successful  in a                                                               
succeeding open season, he noted.                                                                                               
                                                                                                                                
1:36:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON posed  a  scenario in  which  the rate  of                                                               
return was  13.5 percent.  He  asked if that's calculated  on the                                                               
recourse rate or the mix of recourse and negotiated rates.                                                                      
                                                                                                                                
MR. KATZ clarified that it's based on the cost.                                                                                 
                                                                                                                                
MS.  HOLMES further  clarified that  it  would be  the cost  that                                                               
would go into determining the recourse rate.                                                                                    
                                                                                                                                
1:37:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  mentioned that there  is an idea  to allow                                                               
vouchers that would allow buyers  of gas, end users, to subscribe                                                               
for firm  transportation (FT) as well  as shippers.  He  asked if                                                               
FERC would have any problems with the aforementioned.                                                                           
                                                                                                                                
MR. KATZ  said that  he didn't  because FERC  doesn't necessarily                                                               
care  who owns  the capacity  on the  pipeline, but  is concerned                                                               
with whether  there are enough  people paying on the  pipeline to                                                               
make it worthwhile for the pipeline to build.                                                                                   
                                                                                                                                
MS.  HOLMES noted  that FERC  does  have a  requirement that  the                                                               
shipper  on  the  pipeline  holds  the title  to  the  gas  being                                                               
shipped.  She  said she wasn't sure whether  that requirement has                                                               
any implications for the aforementioned concept.                                                                                
                                                                                                                                
MR. KATZ,  in further response  to Representative  Seaton, agreed                                                               
to  provide  the  committee  with guidance  as  to  related  FERC                                                               
regulations.                                                                                                                    
                                                                                                                                
1:39:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  then inquired as  to whether FERC  has any                                                               
control   or  policies   on  the   dismantlement,  removal,   and                                                               
restoration  (DR&R) funds.   He  further inquired  as to  whether                                                               
those  DR&R  funds  accumulate  in a  company  account,  a  trust                                                               
account, or an account that grows with interest.                                                                                
                                                                                                                                
MR. KATZ  responded that typically  FERC hasn't  addressed those.                                                               
He explained that  under the Natural Gas Act if  a pipeline wants                                                               
to  give  up its  facilities  or  service, abandonment,  it  must                                                               
request the  authority to  do so  from FERC.   Usually  FERC will                                                               
examine the  environmental and other  impacts of  the abandonment                                                               
of service and places whatever  requirements necessary to address                                                               
any  environmental damage.   He  noted  that FERC  has, for  some                                                               
offshore pipelines,  allowed for  negative salvage such  that the                                                               
pipeline  has been  allowed to  accumulate some  funds through  a                                                               
charge to decommission or salvage  the project.  Typically, for a                                                               
long-line onshore  pipeline FERC  hasn't done anything  like that                                                               
prospectively.   In  further response  to Representative  Seaton,                                                               
Mr. Katz  said that he didn't  believe there is anything  in FERC                                                               
regulations  that  would  prevent   the  state  from  negotiating                                                               
anything it sees  fit with a prospective shipper.   However, FERC                                                               
would review such when it received an application.                                                                              
                                                                                                                                
1:41:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if the rate  of return assumes the [DR&R] is                                                               
included in the cost.                                                                                                           
                                                                                                                                
MR. KATZ replied, "Typically, it's not."                                                                                        
                                                                                                                                
CO-CHAIR GATTO surmised then that  the [DR&R] expense is going to                                                               
be  borne by  the pipeline  owner.   He  inquired as  to how  the                                                               
pipeline owner  controls that  expense without  any reimbursement                                                               
for it.                                                                                                                         
                                                                                                                                
MR. KATZ explained typically that  is something that FERC imposes                                                               
on the pipeline  at such time as the pipeline  chooses to abandon                                                               
service on portions of its facilities.   The pipeline has to make                                                               
that call  as to whether there  are expenses that it  has to bear                                                               
to do that.                                                                                                                     
                                                                                                                                
1:42:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON recalled testimony  from a pipeline company that                                                               
said  its big  problem with  AGIA is  going all  the way  to FERC                                                               
certification  after  the  first  failed season.    The  pipeline                                                               
company said it would be  hugely expensive and it wasn't prepared                                                               
to  do that.   He  then  inquired as  to the  costs or  timelines                                                               
associated with  continuing to FERC certification  after a failed                                                               
first season.                                                                                                                   
                                                                                                                                
MR. KATZ said he could address  that in detail because the timing                                                               
of  an application  and the  work  leading to  an application  is                                                               
largely in the  hands of the perspective applicant.   However, he                                                               
recalled  that everyone  he  has heard  discuss  the project  has                                                               
assumed that it  will take at least a couple  of years to perform                                                               
the necessary field work.                                                                                                       
                                                                                                                                
1:44:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON  inquired as to  how much of the  material would                                                               
be pertinent  when trying to reach  a second open season  after a                                                               
failed first open season.                                                                                                       
                                                                                                                                
MR. KATZ answered that such would  be up to the applicant because                                                               
the  open   season  proposal  is  developed   by  the  applicant.                                                               
However, there's certainly no reason  why a substantial amount of                                                               
the information from  the first open season  couldn't carry over,                                                               
it depends upon how much the proposal would be changed.                                                                         
                                                                                                                                
1:45:42 PM                                                                                                                    
                                                                                                                                
MR. KATZ,  in response to  Representative Wilson,  clarified that                                                               
FERC doesn't  negotiate with  shippers, producers,  or pipelines.                                                               
He explained that people come  to FERC to file applications, FERC                                                               
conducts a hearing,  and decides what it thinks is  in the public                                                               
interest.                                                                                                                       
                                                                                                                                
1:46:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON referred  to page  7, subparagraph  (C) of                                                               
CSHB 177(O&G)  and related her understanding  that this provision                                                               
specifies that  an applicant  must agree  to the  rolled-in rates                                                               
unless they're over 14 percent.                                                                                                 
                                                                                                                                
MR. KATZ  clarified that  the negotiations  would be  between the                                                               
shippers  and the  pipeline  proponent and  they  would reach  an                                                               
agreement.   He suggested a  situation in which the  shippers and                                                               
the  pipeline  proponent  reach  an  agreement  and  they're  the                                                               
state's selected entity under AGIA,  and therefore they've agreed                                                               
not to  protest rates  unless they are  over a  specified amount.                                                               
Those  agreements would  be between  the state  and the  pipeline                                                               
proponent, but that wouldn't be  between those entities and FERC.                                                               
Therefore, if an  entity came to FERC and wanted  to do something                                                               
inconsistent with  what they  agreed to do  with the  state, they                                                               
could  do so  and FERC  would consider  that proposal.   However,                                                               
that entity may  be in violation of its agreement  with the state                                                               
and could  be sued  in state  court or held  liable at  the state                                                               
level.    Still,  the  agreements at  the  state  level  wouldn't                                                               
preclude FERC  from considering whatever  options that  appear to                                                               
be in  the public interest.   "In  other words, they  could reach                                                               
those   agreements,  but   they  wouldn't   be  binding   on  the                                                               
commission; they  might well be  binding on the  proponent vis-à-                                                               
vis the State of Alaska," he stated.                                                                                            
                                                                                                                                
1:49:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  posed  a  scenario in  which  a  pipeline                                                               
company builds  the pipeline and the  process is at the  point of                                                               
shipping the  gas.  She inquired  as to who would  be responsible                                                               
if there was a hostile takeover of the pipeline company.                                                                        
                                                                                                                                
MR. KATZ  said that it  would depend.   If someone  purchases 100                                                               
percent  of the  stock of  a company,  that's not  something that                                                               
requires  FERC  approval.   If  the  takeover was  structured  in                                                               
another fashion,  FERC approval  would be  required.   He pointed                                                               
out that  in any  case whoever  took over  the pipeline  would be                                                               
required to  continue under  the FERC  certificate with  the same                                                               
terms  and  conditions as  the  previous  entity operated.    Any                                                               
change would require FERC authorization.                                                                                        
                                                                                                                                
1:51:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  announced that the  committee would now  turn its                                                               
attention to  a presentation  by Don Shepler.   He  then reminded                                                               
committee  members that  amendments  would be  accepted from  now                                                               
until  about 3:00  p.m.  Sunday.   He  confirmed that  amendments                                                               
should be to CSHB 177(O&G).                                                                                                     
                                                                                                                                
1:52:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES  related his  understanding that  there will                                                               
be amendments from  the administration.  He asked  if those would                                                               
be available  for review  in order to  avoid the  introduction of                                                               
duplicate amendments.                                                                                                           
                                                                                                                                
CO-CHAIR GATTO said that the  administration's amendments will be                                                               
made available as soon as they are in possession.                                                                               
                                                                                                                                
1:53:38 PM                                                                                                                    
                                                                                                                                
DONALD  SHEPLER, Attorney  at Law,  Greenberg Traurig,  LLP, said                                                               
that he is present on  behalf of the Palin-Parnell Administration                                                               
to  address  FERC issues.    Mr.  Shepler  pointed out  that  the                                                               
handouts to the  committee are the full text of  FERC's orders as                                                               
they relate to pricing of  expansion capacity while the slides of                                                               
the PowerPoint are  pertinent portions of those orders.   He then                                                               
reviewed his  background, which prior  to working as  an attorney                                                               
with the  Law Firm of  Greenberg Traurig, LLP, included  30 years                                                               
as in-house FERC counsel for  various interstate pipelines in the                                                               
Lower 48.   Prior  to that,  he said  he worked  at FERC  and its                                                               
predecessor  agency,  the Federal  Power  Commission,  as both  a                                                               
trial and advisory attorney.   In that capacity he wrote opinions                                                               
for FERC.                                                                                                                       
                                                                                                                                
1:56:10 PM                                                                                                                    
                                                                                                                                
MR.  SHEPLER said  that due  to  the excellent  testimony of  Mr.                                                               
Katz, he wouldn't  go through those parts of  his PowerPoint that                                                               
have  already been  covered.   He  said that  slides 1-5  provide                                                               
background  regarding   from  where  FERC  was   coming  and  the                                                               
congressional mandate it  was addressing when it  issued the 2005                                                               
series of orders.  As related  on slide 2, the 2004 ANGPA [Alaska                                                               
Natural  Gas Pipeline  Act]  mandate to  FERC  stated:   "promote                                                               
competition  in the  exploration, development  and production  of                                                               
Alaska natural  gas."  In  order to achieve that,  FERC concluded                                                               
that  incremental  pricing  of  expansion  capacity  could  place                                                               
expansion shippers at a  significant competitive disadvantage and                                                               
discourage   exploration,  development,   and  production.     As                                                               
mentioned  by Mr.  Katz,  FERC  did find  that  in  light of  the                                                               
uniqueness  of   the  Alaska  project,  a   rate  increase  isn't                                                               
necessarily  a subsidy.   The  aforementioned led  FERC to  posit                                                               
that a  subsidization definition "could be  whether the expansion                                                               
rate is no  higher than the actual initial rate  or of an initial                                                               
rate without built-in subsidies."                                                                                               
                                                                                                                                
1:58:18 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER  explained that the  reference to  built-in subsidies                                                               
refers to the  fact that when FERC receives an  application for a                                                               
certificate or an expansion, it  will review that application and                                                               
the proposed rate  structure to determine how  the expansion will                                                               
be priced,  on an incremental or  rolled-in basis.  The  FERC, in                                                               
considering  a case-specific  application, has  said it  would be                                                               
willing to consider the argument  relating to whether the federal                                                               
government's   loan  guarantees   and  accelerated   depreciation                                                               
amounted to  a "subsidy"  of initial shippers'  rates.   In other                                                               
words, whether  the recourse rates  were pushed down as  a result                                                               
of the government subsidies consisting  of the loan guarantee and                                                               
the accelerated depreciation.                                                                                                   
                                                                                                                                
1:59:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG, referring  to slide  4, asked  if the                                                               
loan guarantees  would have to  be used or  would it merely  be a                                                               
matter of whether they influence the process or loan rates.                                                                     
                                                                                                                                
MR.  SHEPLER answered  that the  assumption is  that because  the                                                               
loan  guarantees  would  tend  to   reduce  the  debt  cost,  the                                                               
expectation  under   AGIA  is  that   the  licensee   would  make                                                               
substantial  use of  those federal  loan guarantees  in order  to                                                               
reduce the  debt cost.   Therefore, [FERC]  does assume  that the                                                               
licensee does  take advantage of  the loan guarantees  or obtains                                                               
financing  at  a  cost  no  higher  than  the  licensee  could've                                                               
obtained had they used the federal loan guarantees.                                                                             
                                                                                                                                
2:00:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked if  the aforementioned  could be                                                               
used as an argument for increasing  the tariffs.  For example, if                                                               
the licensee wanted  to exclude the federal  loan guarantees from                                                               
the rate, could the licensee argue either way.                                                                                  
                                                                                                                                
MR.  SHEPLER  clarified  that  if the  licensee  didn't  use  the                                                               
federal loan guarantees  and their borrowing cost  is higher than                                                               
it would  have been if they  had used the loan  guarantees, there                                                               
would be a question as  to whether that was appropriate financing                                                               
of the  project.  He reminded  the committee that the  goal is to                                                               
obtain  the lowest  cost project.   The  aforementioned would  be                                                               
problematic from the standpoint of the  state as well as FERC, he                                                               
opined.                                                                                                                         
                                                                                                                                
2:01:40 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER,  moving on to  slide 6, highlighted that  the seven-                                                               
year accelerated  depreciation is another benefit  to the project                                                               
sponsor as  it tends to  reduce rates  when it's run  through the                                                               
ratemaking  mechanism.   Additionally, the  AGIA contribution  to                                                               
the  project  would also  tend  to  reduce  the rate  to  initial                                                               
shippers.    Furthermore,  whoever  builds the  North  Slope  gas                                                               
treatment  plant (GTP)  will qualify  for 15  percent income  tax                                                               
credit.   He pointed  out that slide  6 includes  the percentages                                                               
presented by Antony  Scott, Division of Oil &  Gas, Department of                                                               
Natural  Resources.   Collectively, the  value of  the government                                                               
subsidies have the result of  reducing the initial recourse rates                                                               
by more than  15 percent.  He characterized 15  percent as a good                                                               
approximation   of  the   minimum  value   of  those   government                                                               
contributions.                                                                                                                  
                                                                                                                                
2:03:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if the  additional 15 percent federal income                                                               
tax credit given to owners of GTP is utilized nationwide.                                                                       
                                                                                                                                
MR. SHEPLER  replied no,  that provision was  enacted as  part of                                                               
the comprehensive legislation included  in the Alaska Natural Gas                                                               
Pipeline Act in 2004.   He noted that a GTP  is very expensive to                                                               
construct.                                                                                                                      
                                                                                                                                
2:04:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if the cost of  a GTP is kept separate or is                                                               
the pipeline worthless without it.                                                                                              
                                                                                                                                
MR. SHEPLER said that although someone  is going to have to build                                                               
a treatment  plant, AGIA  doesn't address  that issue.   However,                                                               
AGIA does ask  that [an applicant] specify how it  will deal with                                                               
the GTP, regarding who is going to  build it.  If the GTP is part                                                               
of the  AGIA project, then the  GTP [builder] has to  pursue FERC                                                               
certification  and  receive  FERC   jurisdictional  rates.    Mr.                                                               
Shepler  emphasized that  FERC isn't  dictating who  is going  to                                                               
build  the gas  treatment plant.   However,  he highlighted  that                                                               
given the gas quality, someone is going to have to remove the CO                                                                
                                                                2                                                               
and sulfur before it reaches  the mainline because it's corrosive                                                               
in  the  pipeline  and   wouldn't  be  acceptable,  merchantable,                                                               
commercial quality  natural gas  to be  transported.   In further                                                               
response  to Co-Chair  Gatto, Mr.  Shepler acknowledged  that the                                                               
percentages specified on  slide 6 add up to less  than 15 percent                                                               
and noted that  the value of the 15 percent  of income tax credit                                                               
on the  GTP wasn't  included.  That  wasn't included  because the                                                               
cost of  the GTP is unknown.   Mr. Shepler then  turned attention                                                               
to slide  7, which  specifies that AGIA  caps the  roll-in filing                                                               
commitment roughly at the level of governmental subsidies.                                                                      
                                                                                                                                
2:06:34 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER  opined that  FERC recognized in  its order  that the                                                               
argument  relating  to  whether  the  federal  government's  loan                                                               
guarantees and  accelerated depreciations  amounted to  a subsidy                                                               
would be considered by FERC.  He explained:                                                                                     
                                                                                                                                
     What we have  done is we have calculated  the impact of                                                                    
     what  those  contributions  are  and  said  that  as  a                                                                    
     condition  of  obtaining  the  AGIA  license  that  the                                                                    
     applicant would agree to propose  to the FERC rolled-in                                                                    
     treatment up  to the point  that the rate  increase got                                                                    
     to  the  15  percent  level,   which  ...  is  what  we                                                                    
     calculate  to   be  the   value  of   those  government                                                                    
     subsidies which ties  back in to the  FERC's point that                                                                    
     they would  consider that issue in  determining whether                                                                    
     there was  a subsidy when  they were presented  a fact-                                                                    
     specific case.                                                                                                             
                                                                                                                                
2:07:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  pointed  out  that  AGIA sets  the  rate  at  15                                                               
[percent],  but   when  the  aforementioned  numbers   are  added                                                               
together it probably amounts to more than 15 [percent].                                                                         
                                                                                                                                
MR. SHEPLER  said, "I wouldn't try  to put too sharp  a pencil to                                                               
it;  it's  in  rough  numbers  it's  about  15  percent.    We've                                                               
calculated it being more than 15 percent."                                                                                      
                                                                                                                                
2:08:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  surmised  then that  conceivably,  whatever  the                                                               
charge for  rate increases,  it could be  that there's  really no                                                               
increase until more than 15 percent is reached.                                                                                 
                                                                                                                                
MR. SHEPLER said, "I think  I'm agreeing with you, Mr. Chairman."                                                               
He explained that the recourse  rate has already been pushed down                                                               
by at least  15 percent.  Therefore, until the  cost of expansion                                                               
exceeds the  starting recourse  rate plus  the 15  percent that's                                                               
already  a  subsidy from  the  government,  that wouldn't  be  an                                                               
inappropriate subsidy  by existing shippers for  new shippers, he                                                               
opined.                                                                                                                         
                                                                                                                                
2:08:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WILSON related her  understanding that the GTP can                                                               
be  built   by  the  shippers,   the  pipeline  company,   or  an                                                               
independent group.  Still, FERC  reviews the price and determines                                                               
what the people that use the GTP are to be charged.                                                                             
                                                                                                                                
MR. SHEPLER  responded that it  depends.  He reiterated  that the                                                               
GTP has to be built because the  gas must be treated.  The GTP is                                                               
going to  be very costly and  will require payment by  the people                                                               
whose  gas  flows through  it.    Therefore, [the  administration                                                               
believes]  since  the owner,  whoever  that  is, is  receiving  a                                                               
federal income tax credit for  building the GTP, that should flow                                                               
through into the  rates of the treating service.   As a result of                                                               
the  aforementioned, it  will cost  something less  than what  it                                                               
would've cost  without the tax  credit.  Whether FERC  takes that                                                               
into  consideration or  not  depends upon  whether  the plant  is                                                               
deemed to  be under FERC's jurisdiction  or not.  He  said that's                                                               
an issue that would be decided further in the process.                                                                          
                                                                                                                                
2:11:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON opined  that  someone has  to ensure  that                                                               
it's a fair rate for everyone who uses it.                                                                                      
                                                                                                                                
MR. SHEPLER said,  "I really can't answer that  question, I would                                                               
think so."   If FERC regulates the GTP and  certificates it, then                                                               
FERC will set  a rate for it.   He recalled that  the 1977 Alaska                                                               
Natural  Gas  Transmission  System   statute  required  that  the                                                               
treatment  plant  be certificated  as  a  part of  that  project.                                                               
However,  in light  of the  2004 statute  it's apparent  that the                                                               
Alaska project can  be built outside of the  terms and conditions                                                               
of the 1977  statute.  Mr. Shepler pointed out  that in the Lower                                                               
48  the gas  treatment  conditioning isn't  typically a  pipeline                                                               
function and  isn't included in jurisdictional  rates rather it's                                                               
a service provided by another entity.                                                                                           
                                                                                                                                
[CO-CHAIR GATTO passed the gavel to Co-Chair Johnson.]                                                                          
                                                                                                                                
2:13:38 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER,  returning to the PowerPoint,  directed attention to                                                               
slide  8.   He  then  related  that [the  administration]  hasn't                                                               
contemplated that  AGIA would  intrude on  FERC's authority.   In                                                               
the pipeline  world, the  following adage  exists:   "The company                                                               
proposes,  but the  FERC disposes."    He said  that AGIA  merely                                                               
requires that the  pipeline owner file a proposal  to use rolled-                                                               
in rate  treatment up to  the 15 percent.   [The administration],                                                               
he related,  is perfectly  content with  allowing FERC  to decide                                                               
whether rolled-in treatment will be required or not.                                                                            
                                                                                                                                
2:14:59 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER, in response to  Co-Chair Johnson, explained that the                                                               
pipeline  has  to  propose  a certificate  and  a  rate  recovery                                                               
mechanism.    He   related  that  FERC  has  said   that  it  has                                                               
established  a rebuttable  presumption  that  will use  rolled-in                                                               
pricing for an Alaska project.                                                                                                  
                                                                                                                                
2:16:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  asked  then  if the  producers  have  the                                                               
opportunity to argue however they want or are they locked in.                                                                   
                                                                                                                                
2:16:36 PM                                                                                                                    
                                                                                                                                
MR.  SHEPLER   said  that   would  be   answered  later   in  the                                                               
presentation.   He then  returned to  his presentation  [slide 9]                                                               
and  recalled staff  asking whether  rolled-in pricing  went both                                                               
ways in the U.S. as opposed to Canada.   The FERC goal is for the                                                               
lowest  possible   rates  for  as  many   shippers  as  possible.                                                               
Therefore, if  an inexpensive  expansion would  result in  a rate                                                               
reduction to  all of the  customers using the pipeline,  the FERC                                                               
has  universally  required the  use  of  rolled-in pricing  going                                                               
down.   In fact,  in the  Lower 48  FERC doesn't  allow rolled-in                                                               
pricing  going  up.   However,  as  stated  earlier, FERC  has  a                                                               
presumption that it would establish rolled-in pricing going up.                                                                 
                                                                                                                                
2:17:55 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER  moved on to  FERC Order  636, as presented  on slide                                                               
11, which  required that interstate gas  pipelines "unbundle" and                                                               
offer  gas transportation  service  separate from  the gas  sales                                                               
service.   In the  past, the  pipeline purchased  the gas  at one                                                               
end, owned  the pipeline  and service, moved  the gas  to market,                                                               
and then sold  it for the price  of the gas plus the  cost of the                                                               
transportation.  The  price of the gas was regulated  by FERC for                                                               
many years,  he noted.   In  FERC Order  636, the  pipelines were                                                               
told they would  be contract carriers and wouldn't  own their own                                                               
gas  in the  pipeline, and  couldn't sell  gas at  the downstream                                                               
end.   Therefore,  the pipelines  would  simply be  transporters.                                                               
This  order, he  mentioned, was  based upon  complaints that  the                                                               
pipelines  had a  competitive advantage  over  producers and  gas                                                               
marketers who were  trying to sell to gas  users and distributors                                                               
at the downstream end.                                                                                                          
                                                                                                                                
2:19:34 PM                                                                                                                    
                                                                                                                                
MR.  SHEPLER,  referring  to  slide 14,  related  that  FERC  has                                                               
established two species  of rates.  One rate is  a recourse rate,                                                               
which  is   a  cost-based  rate   that  is  set  by   FERC  under                                                               
conventional public  utility ratemaking  methods.  A  minimum and                                                               
maximum rate is established by FERC.   The current policy of FERC                                                               
requires that virtually  all system costs be  recovered through a                                                               
"reservation  charge."   Such  a  charge  is paid  regardless  of                                                               
whether  the   gas  was  shipped.     However,  there   are  some                                                               
exceptions,  including in  the following  circumstances:   if the                                                               
pipeline isn't ready  for service when the  contract provides for                                                               
shipping;  if the  pipe  isn't capable  of  providing service,  a                                                               
credit  is typically  given  for charges  during  that time;  and                                                               
force majeure typically  results in a partial  credit for charges                                                               
back to the shipper.                                                                                                            
                                                                                                                                
2:21:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked  whether the  minimum  and  maximum                                                               
recourse rates set the parameters for  a negotiated rate or is it                                                               
totally independent.                                                                                                            
                                                                                                                                
MR. SHEPLER,  referring to slide  15, said that  negotiated rates                                                               
are the  second species.   He  explained that  FERC will  allow a                                                               
willing buyer and seller of capacity  to agree on an arm's length                                                               
deal to  a rate  that's different  than the  regulated rate.   He                                                               
further explained that  although it may be  somewhere within that                                                               
band, it may  be fixed for the term of  the contract.  Therefore,                                                               
at some  point it could  go outside that  band and even  be above                                                               
the recourse rate.   The FERC says that at  all times a potential                                                               
shipper must have  access to the service at the  recourse rate in                                                               
order to  protect the  small players.   The negotiated  rates are                                                               
becoming more  common, especially in  new projects.  As  a matter                                                               
of policy, FERC  has required that pipelines and  shippers try to                                                               
negotiate cost-sharing arrangements in  order to address the cost                                                               
of new projects,  including cost overruns.  In  fact, the Rockies                                                               
Express Project  that's currently being built  will utilize fixed                                                               
rate contracts  for the  services that will  go forward  once the                                                               
pipeline is  in service.   Whatever  the parties  negotiate, FERC                                                               
will tend to accept, he opined.                                                                                                 
                                                                                                                                
MR. SHEPLER  recalled that  there was  a question  to FERC  as to                                                               
whether it  would look  into the  subsidy issue  if the  rate was                                                               
below the  recourse rate.  He  noted his agreement with  the FERC                                                               
representative who  said that  FERC would  review such  and would                                                               
tend  to  allow  it  as  a deal  between  parties,  although  the                                                               
pipeline company would  be required to design  its recourse rates                                                               
as if  it collected  the full  amount of  the recourse  rate from                                                               
that shipper.  Therefore, the pipeline  is at risk for the degree                                                               
to which it negotiates a  rate that's below it's cost-based rate.                                                               
He  noted  that  sometimes  the  pipeline  company  will  do  the                                                               
aforementioned  in order  to meet  competition or  other reasons.                                                               
Mr.  Shepler  pointed  out  that  typically  a  pipeline  company                                                               
doesn't have  to make a  rate filing on any  particular timeline.                                                               
However, FERC  usually requires [a pipeline  company] after about                                                               
three years  of service of  a new project  to return to  FERC and                                                               
rejustify whether  the initial rate,  based on estimates,  is the                                                               
appropriate rate given the actual costs.                                                                                        
                                                                                                                                
2:25:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled that  Mr. Shepler  mentioned that                                                               
negotiated rates  could be  higher than the  recourse rates.   He                                                               
then asked if  there is language in AGIA that  protects the state                                                               
from entering into the TAPS settlement problem.                                                                                 
                                                                                                                                
MR.  SHEPLER characterized  AGIA  as a  totally different  animal                                                               
than  TAPS.   He highlighted  that  no one  has to  enter into  a                                                               
negotiated rate as  the recourse rate is always available.   If a                                                               
rate  higher than  the recourse  rate is  negotiated, he  said he                                                               
sensed it would  be on one of the rate  components.  For example,                                                               
a rate dependent  upon the amount of volume  actually shipped may                                                               
be negotiated.   The FERC policy, he reminded  the committee, for                                                               
recourse  rates  is  such  that  almost  all  of  the  costs  are                                                               
recovered through  the reservation  charge and  relatively little                                                               
is covered  through the commodity  charge.  Mr. Shepler  did note                                                               
that at  different times the  ratemaking policy of FERC  has been                                                               
different.   There's  no  reason  that a  willing  shipper and  a                                                               
willing  pipeline couldn't  negotiate  a rate  that  had a  lower                                                               
reservation  charge but  a higher  commodity charge  than if  the                                                               
recourse  rate  or  FERC's  straight  fixed  variable  method  of                                                               
establishing rates was applied.                                                                                                 
                                                                                                                                
2:27:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if Mr.  Shepler is convinced that the                                                               
state  doesn't have  to worry  about  a rate  being charged  that                                                               
would then be charged against the state's royalty gas.                                                                          
                                                                                                                                
MR. SHEPLER said  he supposed that's a risk.   He reiterated that                                                               
nothing in  AGIA addresses a  situation in which a  willing buyer                                                               
and a willing seller negotiate  a rate above the cost-based rate.                                                               
In further response to Representative  Seaton, Mr. Shepler agreed                                                               
to review whether  a provision is necessary to  protect the state                                                               
from under-valuation similar to under TAPS.                                                                                     
                                                                                                                                
[CO-CHAIR JOHNSON returned the gavel to Co-Chair Gatto.]                                                                        
                                                                                                                                
2:28:38 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER turned  the committee's attention to  slide 16, which                                                               
addresses  Representative  Wilson's  earlier  question  regarding                                                               
upstream  inducements  and  whether shippers  could  protest  the                                                               
rolled-in treatment.   When introduced AGIA  contemplated that as                                                               
a  condition  of  receiving  the  upstream  inducement,  the  tax                                                               
certainty  and  royalty relief,  a  party  would commit  that  it                                                               
wouldn't oppose  FERC at  the pipeline  filing required  in AGIA.                                                               
He explained that the rationale for the aforementioned is:                                                                      
                                                                                                                                
     We're asking the pipeline to  propose something that is                                                                    
     in the  best interest of  the State of Alaska  in terms                                                                    
     of   facilitating  the   maximum  development   of  the                                                                    
     resources so  that rates are  low for everybody  for as                                                                    
     long as possible.   And, so if the  state wants rolled-                                                                    
     in  rates for  maximizing the  resources, it  should do                                                                    
     what  it  can to  ensure  that  FERC actually  approves                                                                    
     those rates -- that rolled-in  treatment.  So, that was                                                                    
     our rationale  for linking  ... the  access to  the tax                                                                    
     certainty to  the agreement not to  protest the rolled-                                                                    
     in, but only up to the 15 percent.                                                                                         
                                                                                                                                
2:30:20 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER, in response to  Representative Roses, clarified that                                                               
the rolled-in language is in  the legislation twice.  The rolled-                                                               
in language  in the pipeline  context specifies that  the project                                                               
sponsor agrees to  propose and support rolled-in  pricing for the                                                               
expansion.     In  the  upstream   inducements  portion   of  the                                                               
legislation,  it  specifies  that   the  recipients  of  the  tax                                                               
certainty  and  the  royalty  relief agree  not  to  protest  the                                                               
rolled-in rate.                                                                                                                 
                                                                                                                                
2:31:06 PM                                                                                                                    
                                                                                                                                
MR. SHEPLER  moved on  to DR&R,  slide 17,  and pointed  out that                                                               
DR&R is an  oil pipeline term.  In the  gas pipeline industry the                                                               
same concept is referred to as  negative salvage.  He opined that                                                               
FERC didn't quite  understand what it was being  asked.  Negative                                                               
salvage, he  explained, is allowed  for gas pipelines.   However,                                                               
it comes about through rate  cases not in the certificate process                                                               
when the  pipeline is  being permitted.   On  the gas  side, FERC                                                               
requires  that the  dollars associated  with negative  salvage be                                                               
booked in  a separate account  in order to track  the accumulated                                                               
negative   salvage  dollars   that  the   pipeline  company   has                                                               
collected.                                                                                                                      
                                                                                                                                
2:32:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GATTO  noted his  confusion  with  the term  "negative"                                                               
because salvage normally has a positive value.                                                                                  
                                                                                                                                
MR. SHEPLER pointed  out that the term "negative"  [refers to the                                                               
fact] that  it's going to  cost more to  take up [the  pipe] than                                                               
can be obtained when it's melted.                                                                                               
                                                                                                                                
2:32:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  referring to  subparagraph (C) on  page 7                                                               
of   CSHB   177(O&G),   related  his   understanding   that   the                                                               
aforementioned  provision  precludes  the pipeline  company  from                                                               
negotiating  any contracts  or  rate with  a  shipper that  would                                                               
place them  in contractual obligation  or allow them  to contract                                                               
to oppose rolled-in rates.                                                                                                      
                                                                                                                                
MR.  SHEPLER  replied  no,  and specified  that  the  concern  is                                                               
regarding  how to  protect the  recourse rates  for the  shipper.                                                               
[The legislation] specifies that  the recourse rates must reflect                                                               
rolled-in  pricing  to a  certain  level.   The  [administration]                                                               
didn't want  the pipeline  company to  negotiate a  totally flat,                                                               
fixed, or  capped rate  for some  customers under  the negotiated                                                               
rate mechanism that  wouldn't allow them to  recover that roll-in                                                               
from that shipper.   In other words, if 80  percent of a pipeline                                                               
is subject to  negotiated rates and there is a  commitment not to                                                               
raise the  rates beyond  a specified amount,  even if  there's an                                                               
expansion,  then  the  roll-in  can only  be  recovered  from  20                                                               
percent of the pipeline customers  that are under recourse rates.                                                               
Therefore,  [that  20  percent]  will  face  a  substantial  rate                                                               
increase for any expansion.                                                                                                     
                                                                                                                                
2:35:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO  surmised then  that at the  same time  that price                                                               
rises, it  becomes substantially higher for  the pipeline company                                                               
as well.                                                                                                                        
                                                                                                                                
MR. SHEPLER  responded, "As a  recourse rate shipper, yes."   The                                                               
idea [behind the  legislation] is to spread  the costs throughout                                                               
all the  shippers without  limiting the  ability to  recover from                                                               
the negotiated rate group of shippers.                                                                                          
                                                                                                                                
REPRESENTATIVE SEATON suggested then  that would basically result                                                               
in incremental rates.                                                                                                           
                                                                                                                                
MR. SHEPLER noted his agreement that such is the effect.                                                                        
                                                                                                                                
2:36:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  returned  to   the  notion  of  FT  being                                                               
purchased by shippers.  He  recalled that there was some question                                                               
regarding the aforementioned.                                                                                                   
                                                                                                                                
MR. SHEPLER related that [in  Alaska] it's generally assumed that                                                               
the people  who contract for  capacity on the pipeline  are going                                                               
to be  the producers.    Although  that may be  the case,  in the                                                               
Lower 48  it's just as  likely that the  holder of capacity  on a                                                               
pipeline  is   going  to  a   gas  utility,  known  as   a  local                                                               
distribution  company  (LDC)  or  an  electric  generator.    The                                                               
voucher system is  an attempt to create a mechanism  by which the                                                               
party contracting for the capacity  who had no use for production                                                               
tax  credits or  royalty relief  could transfer  that relief  and                                                               
value back  to the producer  with the  production tax and  who is                                                               
subject to the  royalty agreement.  Therefore, even if  an LDC or                                                               
electric  generator  purchased  half   of  the  capacity  in  the                                                               
pipeline, the upstream inducements  would remain available to the                                                               
parties  supplying  gas  into  that  FT  contract.    In  further                                                               
response to  Representative Seaton,  Mr. Shepler noted  that it's                                                               
FERC policy that  an entity holding capacity in  the pipeline has                                                               
to  have  title  to  the  gas  that's  moving  in  that  entity's                                                               
capacity.     He  offered  to   refresh  his  knowledge   on  the                                                               
aforementioned and  provide the  committee with the  policy basis                                                               
behind the provision.                                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON  related  his understanding  then  that  a                                                               
downstream entity  has to purchase  gas from someone in  order to                                                               
have title to it  and be able to ship it.   He surmised that it's                                                               
not a "mechanistic" problem with having downstream purchasing.                                                                  
                                                                                                                                
MR. SHEPLER replied no.                                                                                                         
                                                                                                                                
2:41:43 PM                                                                                                                    
                                                                                                                                
PAT GALVIN,  Commissioner, Department of Revenue,  inquired as to                                                               
whether the committee had any questions for him.                                                                                
                                                                                                                                
2:42:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  requested that Commissioner  Galvin inform                                                               
the  committee of  any other  provisional changes  or ideas  that                                                               
have   been   vetted   in  other   committees   considering   the                                                               
legislation.                                                                                                                    
                                                                                                                                
2:42:43 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  GALVIN   related  that  in  the   Senate  Judiciary                                                               
Standing   Committee   the  administration   suggested   language                                                               
clarifications regarding  the rolled-in  rate treatment  and some                                                               
clarity  with regard  to the  relationship  between the  recourse                                                               
rate  and negotiated  rates.   The administration  also suggested                                                               
language clarifying that the 15 percent  is viewed as a set limit                                                               
from the time the initial shippers  set the rates.  Both of those                                                               
suggestions   were  incorporated   into   the  Senate   companion                                                               
legislation.                                                                                                                    
                                                                                                                                
2:44:05 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN  then turned  to the abandonment  section and                                                               
reminded the  committee of yesterday's discussion  with regard to                                                               
the use of  arbitrators in setting up arbitration  when one party                                                               
thinks a project is economic  and another does not.  Furthermore,                                                               
there  needs  to  be  clarification   with  regard  to  what  the                                                               
arbitrator would  be deciding and  what the standard would  be to                                                               
rule the project uneconomic.   The aforementioned resulted in the                                                               
development of  a test  with regard  to the  determination, which                                                               
was included in the Senate  companion legislation.  Basically, to                                                               
find the  project uneconomic one  must find that it  doesn't have                                                               
existing financing  and it  isn't going  to provide  a reasonable                                                               
rate of return for the resource owner.                                                                                          
                                                                                                                                
2:47:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  asked if this is  an appropriate place                                                               
to review community impacts.                                                                                                    
                                                                                                                                
CO-CHAIR GATTO pointed  out that the experience  of the community                                                               
is that the workers bring their  families and thus there's a need                                                               
for  services  on a  temporary  basis.   The  aforementioned  was                                                               
addressed in the  TAPS issue such that once  the pipeline workers                                                               
left the area, there was a need for balance.                                                                                    
                                                                                                                                
2:48:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG recalled that  in Fairbanks there was a                                                               
moratorium  on  property tax  until  the  production was  flowing                                                               
through  TAPS.   Still,  the  City  of Fairbanks,  which  doesn't                                                               
receive property tax from the  pipeline, experienced huge impacts                                                               
for various  services.  He inquired  as to how such  impacts will                                                               
be mitigated going into this gasline project.                                                                                   
                                                                                                                                
COMMISSIONER GALVIN  said that the administration  does recognize                                                               
that  as  the  project  moves into  the  construction  phase  the                                                               
primary issues will  be related to the  socioeconomic reaction to                                                               
the  oncoming work.   With  regard to  AGIA, Commissioner  Galvin                                                               
opined that  it's too  early in  the process  and there  are many                                                               
unknowns.   However, there will  be adequate time as  the process                                                               
moves forward to address these issues.   He noted that as part of                                                               
the  administration's evaluation  prior  to  the introduction  of                                                               
AGIA   was  the   review  of   a  property   tax  waiver   during                                                               
construction.  Such  a waiver wasn't included  in the legislation                                                               
because there  needs to be  investment in the  communities during                                                               
that period  of time.  He  opined, "We didn't want  to exacerbate                                                               
it by putting  a stop to those  payments.  In the  end, it didn't                                                               
have as much of an impact on  the finances of the project as some                                                               
of the other things that we've included in the bill."                                                                           
                                                                                                                                
2:50:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG  recalled  that out  of  the  previous                                                               
Stranded  Gas Act  was borne  the  municipality assessment  group                                                               
(MAG), which reviewed the impacts  of a pipeline.  He highlighted                                                               
that  a pipeline  traveling down  the highway  impacts more  than                                                               
just Fairbanks.   He  expressed the desire  to include  those who                                                               
worked  on  the aforementioned  in  the  process because  impacts                                                               
start early and linger.                                                                                                         
                                                                                                                                
2:51:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  ROSES referred  to page  8, lines  11-15 of  CSHB                                                               
177(O&G),  and inquired  as to  why  it's important  to have  the                                                               
language "regardless of whether any  shippers bid" versus "if any                                                               
shippers bid".                                                                                                                  
                                                                                                                                
MR. SHEPLER explained  that beyond specifying that  there have to                                                               
be  five  off-take  points,  it restates  FERC  policy  that  the                                                               
applicant,  the  natural gas  company,  still  has to  offer  the                                                               
service even if no one contracts for it.                                                                                        
                                                                                                                                
2:54:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GUTTENBERG recalled  when Mark  Hanley, Anadarko,                                                               
showed the  committee Anadarko's holdings, a  considerable amount                                                               
of which  are in the foothills.   He questioned whether  it would                                                               
be prudent to also include possible input points.                                                                               
                                                                                                                                
MR.  SHEPLER  said  that  he  would  need  to  think  about  that                                                               
question.                                                                                                                       
                                                                                                                                
COMMISSIONER GALVIN mentioned that  when [the administration] was                                                               
conventionalizing  delivery  points,  they were  also  viewed  as                                                               
entry points.   "Once  you tap  in, the gas  can flow  either way                                                               
based  upon the  demand,"  he related.   He  then  said he  would                                                               
ensure that  no language  change is necessary  in order  that the                                                               
aforementioned  isn't precluded.   Ultimately,  through the  AGIA                                                               
process the  state will end up  with a pipeline designed  to ship                                                               
gas for the demand that is present.                                                                                             
                                                                                                                                
2:56:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO asked if the gas  from Cook Inlet requires any GTP                                                               
at all.                                                                                                                         
                                                                                                                                
COMMISSIONER GALVIN said  he isn't aware of any  gas treatment in                                                               
the Cook Inlet.                                                                                                                 
                                                                                                                                
CO-CHAIR GATTO  questioned whether  anyone has evaluated  the gas                                                               
in  Nenana.   He suggested  that requiring  a conditioning  plant                                                               
before the  gas can  be injected  in the  pipe may  overwhelm the                                                               
value, depending upon how much gas  is present and the quality of                                                               
it.                                                                                                                             
                                                                                                                                
COMMISSIONER  GALVIN commented  that  the  aforementioned is  the                                                               
nature of the evaluation process.   At this point, the gas hasn't                                                               
been discovered.                                                                                                                
                                                                                                                                
2:57:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  suggested that the  infrastructure may                                                               
already  be  available to  get  the  gas  off  the AGIA  line  to                                                               
Anchorage, which would be stuck with exporting it.                                                                              
                                                                                                                                
2:57:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR GATTO pointed  out that it's pipeline quality  gas as it                                                               
has been treated.  The treatment  plant, he opined, has a big job                                                               
to do as this gas isn't the  quality of that found in Cook Inlet.                                                               
He mentioned he has heard that  Cook Inlet gas is the cleanest in                                                               
the world.                                                                                                                      
                                                                                                                                
2:58:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES posed  a situation in which  there were four                                                               
bidders and  each bidder met 19  of the 20 requirements  in AGIA.                                                               
In  such  a situation,  he  related  his understanding  that  the                                                               
language on page 9, line 14  of CSHB 177(O&G) would mean that the                                                               
commissioners would  have to  reject all  four of  those bidders.                                                               
He asked if that is the intention.                                                                                              
                                                                                                                                
COMMISSIONER    GALVIN    replied    yes,   and    related    the                                                               
administration's belief that the 20  "must-haves" is a reasonable                                                               
list  and an  application that  doesn't meet  them all  should be                                                               
rejected.   Commissioner  Galvin said  that [the  administration]                                                               
believes it's important  for the state to make  a clear statement                                                               
of what it expects so that  apples to apples can be compared with                                                               
the applications.   Therefore, it was a  deliberative decision to                                                               
use the term "shall".                                                                                                           
                                                                                                                                
3:00:26 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  GALVIN,   in  response  to   Representative  Roses,                                                               
pointed out  that there is a  fiscal note from the  Department of                                                               
Labor  & Workforce  Development regarding  the provision  on page                                                               
24, lines  21-24 of  CSHB 177(O&G)  that specifies  the currently                                                               
projected costs  of this program.   The original structure  of HB                                                               
177 was to include this training  program as an inducement to get                                                               
the  projects.    Based  upon the  discussions  in  the  previous                                                               
committee,  the  decision  was  made to  not  make  the  training                                                               
program exclusive  to the AGIA-licensed projects.   Therefore, it                                                               
was pulled out and made  available as a separate training program                                                               
for any  similar project.   With  regard to  the funding  for the                                                               
training program,  Commissioner Galvin said the  state would come                                                               
up with  the money, likely through  the general fund, to  pay for                                                               
it in order to ensure that the project has an Alaskan workforce.                                                                
                                                                                                                                
3:02:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES  acknowledged that there is  money set aside                                                               
in another area.  However,  he expressed concern that anticipated                                                               
costs never seem to anticipate  enough.  Therefore, he questioned                                                               
whether not  addressing this at  all, precludes [the  state] from                                                               
requesting that there  be matching funds from the  bidder to help                                                               
develop the workforce.                                                                                                          
                                                                                                                                
COMMISSIONER GALVIN  said there wouldn't be  a direct opportunity                                                               
to place an  additional requirement on the licensee  to make such                                                               
a  match in  order  to  continue to  enjoy  the  benefits of  the                                                               
license.  He  said that he didn't think that  AGIA is intended as                                                               
a vehicle to provide such a matching arrangement.                                                                               
                                                                                                                                
REPRESENTATIVE ROSES  surmised then that  nowhere in that  RFA or                                                               
RFP would  there be  any language  referring to  expenditures for                                                               
training.                                                                                                                       
                                                                                                                                
COMMISSIONER  GALVIN related  that in  the past  when there  were                                                               
similar  arrangements for  projects  to  creative incentives  for                                                               
something in return, there was  usually a request associated with                                                               
training.   The aforementioned always met  resistance that seemed                                                               
to  exceed the  actual  monetary cost  of  the training  program.                                                               
Therefore, when  developing AGIA  it was  decided to  promise [to                                                               
the  licensee] that  the  state would  provide  training so  that                                                               
there would be  a workforce for the project and  thus it wouldn't                                                               
be included in an RFA.                                                                                                          
                                                                                                                                
3:06:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON, recalling  the  testimony  from Antony  Scott,                                                               
Division of Oil  & Gas, asked if the Department  of Revenue is in                                                               
agreement with Dr. Scott's testimony and numbers.                                                                               
                                                                                                                                
COMMISSIONER  GALVIN said  that the  administration supports  Dr.                                                               
Scott's testimony.  He did  acknowledge that there are economists                                                               
in the Department of Revenue  and Department of Natural Resources                                                               
who will hold different opinions.                                                                                               
                                                                                                                                
3:08:12 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  GALVIN, in  further response  to Co-Chair  Johnson,                                                               
informed the committee that DNR has  a model that it developed to                                                               
be able to  run a variety of scenarios to  generate an 85 percent                                                               
expectation of a  particular number and a  50 percent expectation                                                               
of other  numbers.  He noted  that DOR doesn't have  an alternate                                                               
way to  develop that  type of  sophisticated result.   Therefore,                                                               
DOR doesn't have a way to generate an alternative view.                                                                         
                                                                                                                                
3:09:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked if it would  serve a purpose to have DOR's                                                               
economist plug DOR's numbers in DNR's formula.                                                                                  
                                                                                                                                
COMMISSIONER  GALVIN said  that the  numbers and  assumptions are                                                               
basically  the same.   He  acknowledged that  there's a  question                                                               
with  regard to  Dr. Scott's  numbers and  how the  FT commitment                                                               
should  be  treated  in  the upstream  economic  forecast.    The                                                               
question is whether those should  be treated as a debt equivalent                                                               
or  not.    Dr.  Scott  made it  clear  that  the  administration                                                               
believes that  the FT commitment  shouldn't be considered  a debt                                                               
instrument when considering upstream economics.   He noted that a                                                               
DOR economist may hold a different  view.  In my opinion and that                                                               
of the  gasline team, that  DOR economist's opinion  isn't backed                                                               
by  that of  the  experts and  isn't  appropriate.   Commissioner                                                               
Galvin,  drawing from  everything he  and the  gasline team  have                                                               
heard, said considering the FT  commitment a debt instrument when                                                               
considering upstream  economics isn't an appropriate  position to                                                               
hold with the economic analysis of the upstream.                                                                                
                                                                                                                                
3:11:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON asked if FERC weighs in on this.                                                                               
                                                                                                                                
COMMISSIONER  GALVIN  replied no,  it's  not  relevant to  FERC's                                                               
analysis.  In further response  to Co-Chair Johnson, Commissioner                                                               
Galvin  said that  one would  have  to review  how the  financial                                                               
community would treat  a similar situation.   In discussions with                                                               
the financial  community, they wouldn't recognize  FT commitments                                                               
as  debt  in  upstream  economics.   Therefore,  he  said  he  is                                                               
confident in the type of  analysis being performed.  Commissioner                                                               
Galvin   clarified  that   the  numbers   were  based   upon  the                                                               
information from the  financial communities, in terms  of how the                                                               
financial communities  would view the  project not based  on [the                                                               
administration's] desired  outcome.  Still, he  acknowledged that                                                               
views based  upon the  desired outcome can  be obtained,  but the                                                               
administration went with the analysis  of those who don't have an                                                               
interest in the outcome.                                                                                                        
                                                                                                                                
3:14:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES  related his understanding that  if there is                                                               
a FT commitment,  then it becomes an asset at  that point because                                                               
they can  now borrow  against that.   Furthermore, it  remains an                                                               
asset until the amount to  which there is commitment exceeds what                                                               
is shipped.   He suggested that the FT commitment  becomes a debt                                                               
when the potential for not being  able to ship what was committed                                                               
becomes a  liability.   Therefore, it depends  upon the  point of                                                               
the process.                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN  highlighted that it's an  obligation to make                                                               
a payment  as well as  an opportunity to get  gas to market.   So                                                               
long  as  one   recognizes  both  ends  of   the  obligation  and                                                               
opportunity, then  it's being given  a fair review.   Ultimately,                                                               
there has to  be a fair representation of the  economic impact of                                                               
a   decision.      Commissioner  Galvin   reiterated   that   the                                                               
administration  believes  Dr.  Scott's numbers  are  the  fairest                                                               
representation.                                                                                                                 
                                                                                                                                
3:17:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE ROSES then turned to  the producer and pointed out                                                               
that  it has  shareholders and  stock that  it sells  on an  open                                                               
market.  He  opined that on the day there's  a pipeline contract,                                                               
an  absolute  commitment,  the  stock  of  those  companies  will                                                               
actually  rise in  value.    He further  opined  that when  those                                                               
companies can't  meet the obligation,  there would be  a decrease                                                               
in their  stock value.   The aforementioned  would prove  that it                                                               
was a liability/debt, he opined.                                                                                                
                                                                                                                                
3:18:15 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN, in response  to Co-Chair Johnson, reiterated                                                               
the  need to  recognize both  sides  of the  decision.   If a  FT                                                               
commitment is  going to be  made, there's suddenly  many reserves                                                               
to  book because  there  is  an opportunity  to  place them  into                                                               
market.   He  emphasized that  the  FT commitment  isn't a  debt.                                                               
Although there can  be an argument that it  is debt, Commissioner                                                               
Galvin  stressed  that   it  isn't  appropriate  to   make  a  FT                                                               
commitment a  debt-like instrument  for the purposes  of economic                                                               
evaluation.   The aforementioned is supported  by the information                                                               
from  financial communities,  oil and  gas companies,  and others                                                               
without an interest in making this argument.                                                                                    
                                                                                                                                
3:19:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOHNSON  commented that  if  this  is accurate,  it  is                                                               
really damning information and really sways his opinion.                                                                        
                                                                                                                                
COMMISSIONER  GALVIN said  that there  is a  tendency to  want to                                                               
view everything as someone's view  of the truth.  Ultimately, the                                                               
administration  and the  legislature is  striving for  the truth,                                                               
not  just a  version  of it.   He  suggested  that the  committee                                                               
review  what the  administration  has presented  as  well as  the                                                               
legislature's  own  economic  advisors  from a  year  ago.    The                                                               
numbers  presented a  year ago  are consistent  with Dr.  Scott's                                                               
numbers,  he pointed  out.   Commissioner  Galvin stated,  "We're                                                               
doing  the  best   in  our  ability  to  identify   what  is  the                                                               
appropriate way to  evaluate this project because in  the end the                                                               
state's interests  are borne  by having  the best  information we                                                               
can provide for you rather than  trying to push us in a direction                                                               
that ends up failing."                                                                                                          
                                                                                                                                
3:23:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  from a fisherman's standpoint,  said that                                                               
there's a  debt when  three is  a payment  and an  interest rate.                                                               
When  FT is  taken, there's  no  payment or  interest unless  the                                                               
product  isn't shipped  at which  point the  part not  shipped is                                                               
converted to debt.                                                                                                              
                                                                                                                                
CO-CHAIR JOHNSON,  from a  parent's standpoint,  said if  a child                                                               
asks a parent to co-sign on a  loan for a car, the parent doesn't                                                               
face payments or  interest.  However, the  parent's credit rating                                                               
is impacted, which is a debt.  This is the problem, he opined.                                                                  
                                                                                                                                
CO-CHAIR GATTO said  that the FT commitment could  be referred to                                                               
as debt.   However,  it's not a  fair appraisal  because although                                                               
the obligation  of debt is  there, it  produces an asset  and the                                                               
asset overwhelms the debt.                                                                                                      
                                                                                                                                
3:26:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked if the legislation  specifies that a                                                               
community dividend  and the  60 percent  profit sharing  with the                                                               
state will  only be countered  if contractually obligated  in the                                                               
license.   He also recalled  that there was something  related to                                                               
municipal  revenue sharing  payments  and whether  those will  be                                                               
counted as  part of the  net present value anticipated  cash flow                                                               
to  the  state  from  the  proposal.   He  inquired  as  to  what                                                               
categories will be considered net  present value and cash flow to                                                               
the state.                                                                                                                      
                                                                                                                                
3:29:15 PM                                                                                                                    
                                                                                                                                
COMMISSIONER GALVIN said that  the administration hasn't prepared                                                               
nor  is it  in  the  process of  preparing  an  amendment to  the                                                               
section  described by  Representative  Seaton.   He  acknowledged                                                               
that the provision  doesn't include cash flows  to a municipality                                                               
of the state.   The administration hasn't  made the determination                                                               
that  it's necessary  to expand  it to  include such  cash flows.                                                               
With  regard to  whether  or not  additional  revenue that  would                                                               
result  in a  cash payment  to the  state would  be included,  he                                                               
opined that would  likely fall under "other factors  found by the                                                               
commissioners to  be relevant  to the  evaluation of  net present                                                               
value of  cash flows  to the  state" and  could be  expanded more                                                               
fully  in   the  RFA.     "As   far  as   the  payments   to  the                                                               
municipalities,  we're  not  currently   including  that  in  our                                                               
interpretation," he specified.                                                                                                  
                                                                                                                                
3:31:07 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  GALVIN   related  that   he  didn't   believe  [the                                                               
administration] would  object if the legislature  feels that cash                                                               
flows  to  municipalities  should  be included  as  part  of  the                                                               
evaluation  criteria.   He  characterized it  as  a policy  call.                                                               
From  the  state's  perspective,  it's a  matter  of  whether  it                                                               
actually provides an  offset to other obligations  that the state                                                               
would have to make.                                                                                                             
                                                                                                                                
3:31:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON recalled  that the  administration brought                                                               
forward  an  amendment  to  the  Senate's  companion  legislation                                                               
regarding carbon emissions.   He asked if that  amendment will be                                                               
brought forward for HB 177.                                                                                                     
                                                                                                                                
3:31:46 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  GALVIN  replied  yes.     In  further  response  to                                                               
Representative Seaton, Commissioner Galvin  confirmed that the FT                                                               
voucher  amendment  will  also  be  brought  forward.    He  then                                                               
explained that the administration is  in the process of reviewing                                                               
CSHB  177(O&G)  and CSSB  104(JUD)  to  identify the  differences                                                               
between the  two and prepare  amendments for them.   He clarified                                                               
that  there  will  be  amendments   that  arise  to  improve  the                                                               
legislation as  well as amendments  made by the  Senate committee                                                               
for discussion.   There will also  be amendments that are  due to                                                               
the drafter's  refinement of the  language.   Commissioner Galvin                                                               
informed  the committee  that the  intent is  to make  amendments                                                               
available to align the two versions.                                                                                            
                                                                                                                                
[HB 177 was held over.]                                                                                                         
                                                                                                                                
3:33:54 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
CO-CHAIR GATTO recessed the House Resources Standing Committee                                                                  
at 3:34 p.m. to the call of the chair until 1:00 p.m. April 21,                                                                 
2007.                                                                                                                           

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