Legislature(2005 - 2006)
06/02/2006 11:06 AM House RES
| Audio | Topic |
|---|---|
| Start | |
| HB2004 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
June 2, 2006
11:06 a.m.
MEMBERS PRESENT
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Jim Elkins
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Paul Seaton
Representative Harry Crawford
Representative Mary Kapsner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mark Neuman
COMMITTEE CALENDAR
HOUSE BILL NO. 2004
"An Act relating to the Alaska Stranded Gas Development Act,
including clarifications or provision of additional authority
for the development of stranded gas fiscal contract terms;
making a conforming amendment to the Revised Uniform Arbitration
Act; relating to municipal impact money received under the terms
of a stranded gas fiscal contract; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB2004
SHORT TITLE: STRANDED GAS DEVELOPMENT ACT AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
05/31/06 (H) READ THE FIRST TIME - REFERRALS
05/31/06 (H) RES, JUD
06/01/06 (H) RES AT 9:00 AM CAPITOL 124
06/01/06 (H) Heard & Held
06/01/06 (H) MINUTE(RES)
06/02/06 (H) RES AT 9:00 AM CAPITOL 124
WITNESS REGISTER
JOSEPH DONOHUE, Staff
Preston Gates and Ellis LLP
Anchorage, Alaska
POSITION STATEMENT: Presented HB 2004.
KEVIN JARDELL, Legislative Liaison
Office of the Governor
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 2004.
BOB LOEFFLER
Morrison & Foerster
Counsel to the Governor
Office of the Governor
Juneau, Alaska
POSITION STATEMENT: Answered questions regarding HB 2004.
DAVE VAN TUYL, Commercial Manager
Alaska Gas Group
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Answered questions regarding HB 2004.
WENDY KING, Director
External Strategies
ANS Gas Development
ConocoPhillips Alaska, Inc.
POSITION STATEMENT: Answered questions regarding HB 2004.
ACTION NARRATIVE
CO-CHAIR RALPH SAMUELS called the House Resources Standing
Committee meeting to order at 11:06:51 AM. Representatives
Elkins, Gatto, Olson, Seaton, Ramras, and Samuels were present
at the call to order. Representatives LeDoux, Crawford, and
Kapsner arrived as the meeting was in progress.
HB 2004-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
11:07:21 AM
CO-CHAIR SAMUELS announced that the only order of business would
be HOUSE BILL NO. 2004, "An Act relating to the Alaska Stranded
Gas Development Act, including clarifications or provision of
additional authority for the development of stranded gas fiscal
contract terms; making a conforming amendment to the Revised
Uniform Arbitration Act; relating to municipal impact money
received under the terms of a stranded gas fiscal contract; and
providing for an effective date."
11:07:22 AM
JOSEPH K. DONOHUE, Preston Gates & Ellis LLP, noted that he has
been working with the Department of Law on the [Alaska] Stranded
Gas Development Act (SGDA) conforming amendments bill. He
indicated that the materials he provided include a
recommendation that the questions related to the in-state use of
gas [asked during the June 2 House Resources Standing Committee
meeting] be directed to Bob Loeffler, whom he said would be
available some time during the meeting. He said a list of those
questions was being typed at present [subsequently included in
the committee packet]. He recollected that one of the questions
had been whether or not there is a term limit for
representatives appointed to the Municipal Advisory Group (MAG).
He explained that the group is an informal entity created by
statute and formed at the time an application is submitted under
the SGDA. He relayed that the commissioner of the Department of
Revenue notifies effected municipalities, and the mayor of the
municipality appoints the representative, who serves at the
pleasure of the mayor.
MR. DONOHUE specified that the proposed amendment in Section 15
of HB 2004 deals with extending the life of the MAG itself. He
continued:
The MAG ceases to exist under current law at the time
the final auction is made, with regard to the
application that the advisory group is formed to
address. So, ... under the current law, the MAG
entity would disband - would no longer serve the
statutory purpose - at the time the legislature
authorizes the proposed contract under the SGDA
statutory provisions. The proposed amendment would
extend the life of the Municipal Advisory Group
through the end of the distribution of the impact
payments, which are provided for under Article 18 of
the proposed fiscal contract, which is a six-period
following project sanction, or, with the commencement
of commercial operations of the pipeline - whichever
comes first.
11:11:18 AM
REPRESENTATIVE SEATON said the language reads, "the latter of 90
days after final distribution," thus he asked if Mr. Donahue
meant to say, "whichever comes last."
11:11:47 AM
MR. DONOHUE said he stands corrected; it's the later of the two
events.
11:12:23 AM
REPRESENTATIVE GATTO asked what happens in a community in which
"the impact" still lingers.
11:12:56 AM
MR. DONOHUE offered his understanding that under the proposed
fiscal contract, the impact monies provided by the "mid-stream
entities" will pay out over a six-year period up to $125
million. To the extent that there are impacts after that, he
added, the state would have to deal with that through its own
grant program, or many of the political subdivisions impacted
would have revenue-producing PILTs [payments in lieu of taxes]
directed to them. He said:
So, there will be a constant stream of revenue based
on the completed project. So, there will be an
opportunity for the political subdivisions to offset
those impacts with that revenue, which is kind of the
normal process. During the construction period it's
somewhat abnormal, because there's a limitation on the
ability of the political subdivisions to impose taxes.
11:14:07 AM
REPRESENTATIVE GATTO predicted that even with a "start-up," it
would be years before there would be "a revenue stream from
which to take money to continue to serve as impact money."
11:14:29 AM
MR. DONOHUE responded that once a decision regarding project
sanction is made, it is in everybody's interest to complete the
project expediently.
11:14:53 AM
REPRESENTATIVE GATTO indicated that he is talking about the odds
of impact money sources continuing or tapering down beyond the
contract period, rather than just ending.
11:15:34 AM
MR. DONOHUE noted that the schedule of payments in Article 18
does taper off, but he recognized that that doesn't address
Representative Gatto's concern about impacts beyond the period
of the contractual payments.
CO-CHAIR SAMUELS noted that property tax money would start to
flow once the gas starts to flow, and that money would go to the
impacted community also. He said the impact money is for the
construction phase, assuming that it is stretched out long
enough to when gas flows and the property tax money kicks in.
REPRESENTATIVE GATTO asked, "You don't get the property tax
money when the property's improved?"
CO-CHAIR SAMUELS answered that it would depend on the value,
which has to do with when the operating systems are built.
11:16:53 AM
REPRESENTATIVE SEATON reminded everyone that in the contract the
money is payment in lieu of taxes; therefore, there won't be a
property tax. He asked, "Is that the schedule for through-put
to start - it appears after project sanction, or do we have a
gap there?"
11:17:03 AM
MR. DONOHUE answered, "I think that's the best estimate of the
construction period, but again, Representative Seaton, I think
... it's in everybody's best interest to beat that schedule."
CO-CHAIR SAMUELS said he thinks "the construction should
actually be shorter."
11:19:17 AM
KEVIN JARDELL, Legislative Liaison, Governor's Legislative
Office, Office of the Governor, mentioned two questions brought
up the day before that have not yet been answered: One question
is regarding whether the state has ever waived its sovereignty
to the degree that allowed the state to be sued in other
jurisdictions. The other question, he noted, has to do with
permanent fund assets. The answers to those questions, he said,
would be available soon.
11:19:52 AM
MR. DONOHUE directed attention to question 2 on the handout,
which asks whether a tax rate incorporated into a payment in
lieu of tax provision of a contract ratified by the legislature
can later be modified by mutual agreement of the parties. He
said it is the view of the administration that there is no
leeway for material amendments to the contract in subsequent
years. However, there is a section in the proposed contract
that deals with amendments to the fiscal contract, and that is
in Article 39.1, he said. That language provides that the terms
of the contract could be modified by mutual agreement, in
writing. So, theoretically, he relayed, future administrations
could agree to a different tax rate than the one proposed and
authorized initially by the legislature. He reviewed the
administration's suggestion regarding the question, which read
as follows [original punctuation provided]:
To avoid there being such an issue, the legislature
could consider amending AS 43.82.435 by adding: "A
contract authorized by this section and executed by
the Governor may contain provisions that provide for
amendment of contract terms without further action by
the legislature except that any term relating to taxes
described in AS 43.82.210(a), or payments in lieu of
such taxes, may not be amended without further
legislative authorization under this section."
11:22:42 AM
MR. DONOHUE turned to question 3, which asks for examples of the
modifications of lease and unit agreements contemplated by the
expanded authority proposed by amendments to AS 43.80.020 and
220. He said the administration sought answers to this question
from the Department of Natural Resources, and the deputy
commissioner responded. Mr. Donohue said, "I think the question
initially was focused on unit agreements, and the best example
of modification of unit agreements is the example I gave
yesterday, which is the Point Thomson article in the proposed
contract." He continued:
There is ongoing dispute between the lessees of that
unit and the state as to whether or not they have
properly pursued development of those leases in that
unit, and the article in the proposed contract
suspends that dispute for a period of time, sets a
schedule for develop of Point Thomson, pursuant to the
... project plan, and, ... to the extent that there is
a dispute about the rights and obligations and duties
of the lessees, that is probably the primary example
of modifications of ... a unit agreement."
MR. DONOHUE brought attention to the first paragraph of the
response to question 3, which read as follows [original
punctuation provided]:
The proposed contract provisions (1) redefine upstream
royalty responsibilities of the state with respect to
payment of gas-related field costs such as cleaning,
gathering, treating, and dehydration; (2) assign
responsibility to the state for conditioning of
royalty gas and disposal of impurities associated with
the conditioning of that gas; (3) limit over the term
of the contract the state's ability to switch between
royalty in kind and royalty in value; (4) define
points of delivery for royalty gas; (5) assign
responsibility for downstream NGL [natural gas
liquids] extraction; and (6) provide an optional
alternate royalty rate for certain sliding scale
royalty leases.
11:25:31 AM
REPRESENTATIVE SEATON, regarding the provision to "provide an
optional alternative royalty rate for certain sliding scale
royalty leases," asked if that allows a modification for royalty
rates.
11:26:10 AM
MR. DONOHUE said he thinks the answer is yes, but he said that
answer should come from DNR.
11:26:33 AM
CO-CHAIR SAMUELS proffered, "I believe that had to do with ...
the net profit share leases that are already in existence - not
... the general leases ..., but there are some that are sliding
scale, depending on the profit of the company already."
11:26:57 AM
REPRESENTATIVE SEATON said he would like "a definition of
parameters" related to the aforementioned provision and what
that could allow as far as changes in royalty rates by the
commissioner under the contract.
11:27:19 AM
MR. DONOHUE directed attention to question 5 on the handout,
which asks for a comparison of the case law relating to the
phrases "in best interests of the state" versus "in the long-
term fiscal interests of the state." He summarized the answer
found on the handout. First, there is no case law outlining
what "long-term fiscal interest" means, although it is a term of
art that is consistently used throughout the SGDA. Conversely,
the term, "best interests of the state" has been litigated
within the state of Alaska and has generally been found under
Article 8 of the Alaska State Constitution as meaning to
"develop the resources for the maximum use consistent with
public interest, and to utilize all resources belonging to the
state for the maximum benefit of the people."
11:29:45 AM
CO-CHAIR SAMUELS noted that another new handout from Legislative
Legal and Research Services addresses the same topic.
MR. DONOHUE opined that the idea of substituting "long-term
fiscal interest" for "best interest" is still worthy of
consideration, because the entire SGDA process is focused on
fashioning a fiscal regime that both the state and producers can
live with. He continued:
To the extent that each one of these terms can be
justified either by that or by the language in ...
.200 (a)(7), as something ... reasonable and
appropriate for the implementation of the various
provisions of the act, such as obtaining an equity
interest, taking your ... production tax payment in-
kind, and committing to shipping positions on the ...
project. So, we do believe the language that we've
proposed provides greater flexibility, but we cannot
say that long-term fiscal interest is well documented
in the caseload.
11:31:26 AM
REPRESENTATIVE LEDOUX suggested changing "the other statute"
that refers to long-term fiscal interest of the state, in order
to make it consistent with "best interest of the state."
11:31:51 AM
MR. JARDELL responded that because preliminary findings have
already been made "under that statute," it would be problematic
to change the standard "after those standards have already been
utilized and the contract is out to the public for review."
11:32:15 AM
REPRESENTATIVE LEDOUX asked Mr. Jardell if he thinks the
findings would have been different if [the Department of Law]
had used "best interests of the state" rather than "long-term
fiscal interests of the state."
11:32:50 AM
MR. JARDELL noted that the Department of Law used the "long-term
fiscal interests" as a narrower definition than "best
interests," thus, he said he does not believe "that would change
the commissioner's decisions." He added, "However, I think it
would certainly cast questions as to whether or not you had to
begin the process anew, or what exactly that would entail from a
process and procedural standpoint. So, I don't think there'd be
substantive changes, but I think it could very well ... cause
some questions and concerns over what does it mean if you've
changed it - the process as we go forward."
MR. JARDELL said the case law was not the only thing researched;
the minutes of the SGDA were also reviewed to see if there was
any direction from the legislature. He said, "We could not find
any direction as to why there would be two different standards."
He continued:
Then, based on the Department of Law's review that the
"best interest" is a broader standard than the more
narrow one, we think the consistency would actually
just answer the question that, yes, keep consistent,
keep the standard in place, and move forward. And so,
we think there's still value in that. Is it
necessarily something that is ... absolutely critical?
Like we said, we think it's broader, so it may not be
critical; but it does really ... pose the question,
"Did the legislature intend it, what did they intend?"
And there is no answer.
11:34:14 AM
REPRESENTATIVE GATTO asked, "Is not the long-term fiscal
interest included in the best interest?"
11:34:28 AM
MR. JARDELL responded that it would be, because the long-term
fiscal interest finding is narrower than the best-interest
finding.
11:34:36 AM
REPRESENTATIVE GATTO asked, "So, would you say we lose nothing
by staying with "best-interests," since we already include long-
term fiscal interest?"
11:34:48 AM
MR. JARDELL replied:
I think there's value in establishing a clear process
and procedure that doesn't open up questions as to why
the legislature wanted us to use one standard in one
place - a more narrow one - and then broaden it out to
the other standard ... before you submit the contract.
There is no answer to the question as to why it was
done that way. The question: "Is it just a drafting
issue; was there an intent to have a different
standard; what was that different standard?" There is
no direction. And so, by allowing it to remain, you
allow that question to be asked - potentially
litigated - and when we're looking at preliminary
findings that we've already issued, and that everybody
can ... read ..., we look at it and say, "Well, if
you're making preliminary findings, you should move
those findings to final findings." And we think
continuing with the standard makes sense, answers that
question, and provides a more efficient and thorough
process.
11:35:48 AM
REPRESENTATIVE CRAWFORD opined:
It seems to me that when the legislature used two
different terms and weren't clear, and there's nothing
to fall back in ... the records, that at that point
you're supposed to fall back to the most basic, which
is our constitution. And it's fairly clear that the
constitution says that the best interest of the state
and maximum benefit to the people of the state. So,
it would seem to me that, rather than change it to the
"long-term interest of the state," let's use a defined
term, which is the "best interest of the state. I
feel perfectly comfortable going with something that's
in the best interest of the state. Even if there was
a case where ... we might take less money for four or
five years, because we were going to get it for 20
years longer, you could make the case in a court that
that actually is in the best interest of that state.
I don't think that what we want is to be able to make
the case that, "Well, it's in the ... interest of the
state to take ... less money for 25 or 30 years,
because we might not get another chance to get a
pipeline."
11:37:37 AM
MR. JARDELL responded:
I disagree that you fall back to the constitution. We
start with the constitution; that's an overriding
principle that we have to comply with, regardless of
what state statute says. And so, the provisions that
you cite in the constitution are always in force, and
are always controlling over this contract, regardless
of what standards ... the legislature set in the
statute. ... This really gets to when the
commissioner is supposed to make findings under a
standard, what standard should the commissioner use?
And the legislature said, "When you make your
preliminary decision, you should do it in a long-term
fiscal interest.
It makes sense if you look at the context of the
stranded gas Act when it was introduced and as it's
been amended, because its focus is on the economics of
the project, the purpose was to negotiate a deal that
changed the economics so that we can market our gas.
The fiscal nature of the stranded gas Act seems to
make some sense. So, we made preliminary findings.
So, now it is: "... When you get to the final, do you
want a lesser standard? Do you want to broaden it out
to where you don't really need the ... long-term
fiscal interest?" Now maybe you could do what you
suggested wouldn't be good and say, "Well, it's going
to extend TAPS [Trans-Alaska Pipeline System] for 20
to 30 years; increase production ... through the oil
TAPS pipeline. And that's in the best interests of
the state, and so we're going to find it okay."
REPRESENTATIVE CRAWFORD interjected, "That's what I said."
MR. JARDELL continued:
Long-term fiscal interest is a more narrow definition
- it's actually a higher standard - but for us, it's
one that is consistent, and so we don't have to go
through and ask the question and answer the question,
"Why the difference?"
11:39:25 AM
REPRESENTATIVE GATTO remarked that the constitution doesn't use
the term "best interest," but it does use the term, "maximum
benefit." He said, "Best interest could be jobs, it could be
maintaining infrastructure; there could be several things that
are not in the long-term fiscal stability interest benefit or
any other term." He said he would be amenable to using "best
interest, including long-term fiscal interest," rather than
using one without the other.
11:40:54 AM
MR. DONOHUE moved on to question 6 in the handout, regarding
whether LLCs could be subject to a corporate income tax in the
future, specifically, whether LLCs formed to own some of the
project segments could be subject to revisions to the corporate
income tax. He continued:
As a general, theoretical matter, the state could
probably impose corporate income tax on limited
liability companies. But specifically with regard to
these companies, ... [they] would be protected by the
fiscal stability provisions in Article 11. They would
be exempt from the corporate income tax.
11:43:21 AM
MR. DONOHUE, in response to a question from Co-Chair Samuels,
explained the following:
The ConocoPhillips [Alaska, Inc.] entity that owns a
membership interest in the main line ... LLC ... would
be affiliated with the production company, possibly
the parent, and it's part of the unitary business
which files a corporate income tax under the PILT
provision - I think it's Article 19, it's called SCIT,
the state's corporate income tax - that affiliate is
subject to corporate income tax, subject to a PILT.
The ... PILT, ... there's a lot of small differences,
but the main difference is that the SCIT, Article 19,
locks in the corporate income tax as of October 2005.
Now, if ConocoPhillips' affiliate, who owns the
membership interest in the LLC, assigns that to an
entity that is not affiliated with the producer, then
that entity inherits some of the rights under the
contract ..., except for the corporate income tax.
So, [an] unaffiliated, new entrant to an LLC would be
subject to corporate income tax. I think the way it
actually works, it begins with the SCIT, but there's
no guarantee that that would be limited. So, it could
change during the life for that particular company.
11:45:03 AM
REPRESENTATIVE SEATON asked if an LLC member whose only business
in the state is under this contract, would be required, under
this contract, to file a separate income tax.
MR. DONOHUE answered yes, they would be subject to corporate
income and would have to file and pay, based on their on
activities in Alaska.
REPRESENTATIVE SEATON asked, "Even if those activities are
totally limited to this LLC activity that's covered under the
contract? Because normally LLCs do not pay any income tax on
the distribution. The corporations, if they're here and they
have other activities are filing corporate income tax."
MR. DONOHUE confirmed Representative Seaton's comments are
correct. The membership entity would be a taxable entity in the
State of Alaska.
CO-CHAIR SAMUELS asked, "Even if they were an LLC ... not part
of a big LLC ...?"
MR. DONOHUE asked, "Even if they were a single member LLC that
becomes a member in this LLC?"
CO-CHAIR SAMUELS answered yes.
MR. DONOHUE said, "I think that if the single member -- you
still have an entity that is owning the LLC, and I believe would
still be subject to tax in the state, because the distributions
would be running through two LLCs."
11:47:00 AM
REPRESENTATIVE SEATON said there is no other LLC taxing
authority, thus he would like to see the language included that
would tax the LLC.
11:47:31 AM
MR. JARDELL said he would make that language available to the
committee.
11:48:04 AM
CO-CHAIR SAMUELS, following up on Representative Seaton's
previous question, said:
I own an LLC. The LLC pays no taxes. The income from
that flows to me; I pay no taxes. So, if my LLC that
I own bought out ConocoPhillips' ... portion of the
main line entity, would then the state take a hit?
Because Conoco is paying corporate income taxes on the
income from the main line LLC, but my LLC would not,
because I don't pay any taxes.
11:49:57 AM
BOB LOEFFLER, Morrison & Foerster, Counsel to the Governor,
Office of the Governor, addressed question 4 in the handout,
which asks for a discussion of HB 2004, Section 6(c), AS
43.82.220(1)(c), and the "ramp up of local gas use." He said he
would walk through the normal sequence: the open season, post-
open season, and what happens after the pipeline is operational.
He continued:
What the contract requires is that the project
complete a study of the needs for gas in state before
the open season. That's an improvement on what the
federal legislation required, because they had it at a
much later time. So, the very first step is that
there will be a study either done by the state and
adopted by the project, or done by the project, that
identifies what the excavated in-state needs for gas
are. And ... as you think about that, one of the
parameters of that study will be when will gas be
needed and what the ramp up will be, will any be
needed to begin with? And it's better to have
knowledge in the beginning, and you can sort of tailor
the circumstances of tariffs and expansion, and even
design to those needs. So, step one is this study of
in-state needs before the open season.
Number two, the contract requires that the project
consult with the state on the locations for taking gas
off inside Alaska. So, that's sort of step two.
Another step is that the project shall fund up to four
off-state points in Alaska. It's clear when you think
about it, but the point there is to get, as much as
possible, the off-tank points in Alaska designed into
the project to begin with, before it's up and running,
so you don't have to deal with ... tapping into a live
pipe and things like that. Now, the requirement is
they fund up to four, but beyond that maybe additional
ones agreed upon or even required by FERC [Federal
Energy Regulatory Commission].
Another part of the contract is that the project is
the main line, it is not the lateral that would feed
Fairbanks or feed wherever. And the laterals can be
owned by anyone. But the project is required to
cooperate with the sponsors of the connecting pipe, in
terms of the plans - the inner connection, and we ...
added that to the contract. What happens then is you
get to the open season, which, anyone's guess, but it
might be a year-and-a-half to two years from now. And
at that time, the FERC regulations require the
pipeline to offer two different categories of service.
One category of service is the long haul out of the
state to Alberta, or wherever. And the other service
that is to be offered is a service for in state ...
deliveries. And that, of course, should correspond to
what the in state study tells about where the gas is
needed in state. And so, in the open season, the
pipeline will offer a rate for service in state. And
the important thing about that rate is that the
regulations require that it be defined, in terms of
the costs that you incur inside Alaska to deliver gas,
and not the costs of taking the gas long haul out of
Alaska. So, there's ... two separate kinds of tariff
offers, two kinds of rates, and then, when they come
to evaluate the people who have put in bids for those
rates, the bidding evaluation for the in-state service
is supposed to be separate from the bidding evaluation
for the out-of-state service.
11:55:17 AM
MR. LOEFFLER said people can bid according to what "the
pipeline" offers for in-state service, but bidders can also
suggest the need for different service - at a different point or
time. Those bids, he noted, would be nonconforming to the
offering of "the pipeline," but "the pipeline" would be required
to evaluate them. He stated that the first critical juncture is
open season, at which not everything will be known about the
specifics of in-state deeds, but at least it may be identified
where the desirable off-take points are or how much gas will be
needed. He said "the pipeline" is offering shipper's rights -
the right to transport gas from one place to another - it is not
offering the gas itself, which he said is a separate question.
MR. LOEFFLER continued:
The next thing that happens is the pipeline assembles
all these bids and awards capacity to people according
to the most valuable bid, but again, it has to look at
the in-state bid separately. And if it gets enough
long-term bids, it takes those as part of its
financing and puts it into its application to the
FERC.
Now, it is a requirement of the FERC regulation that
if ... someone wants to make a late bid, and has a
good reason for that, that person can submit a late
bid for capacity, and the pipeline has to consider
that. And that might have some value, because as the
needs become clearer for Fairbanks or anywhere in
state, because circumstances develop after the open
season, there is the option - with conditions - of
putting in a late bid.
The other thing that is likely to happen is the
pipeline probably will design somewhat more capacity
than a 100 percent fit with the bid, because it wants
to have some flexibility later on. If it designs in
too much extra capacity, the FERC general rules
require that it bears the cost of that extra capacity;
they can't put it on shippers. So, to recap: You've
got the open season and the requirements of the
contract and the regulation designed to identify in-
state deeds, in-state service, [and] in-state tariff,
and you can say -- and then you've got this other late
fee. And then the question is what the project must
do, even if no one bids successfully for in-state
delivery. And I'll quote what the FERC's said, and I
had to refresh my own memory, but it says, "There is a
continuing obligation for the perspective applicant to
leave provision for such in-state service available in
its tariff." They would not have to voluntarily
propose it as part of its initial application. So,
it's sort of a placeholder for later service.
11:59:33 AM
MR. LOEFFLER said once the project is up and running, there are
some possibilities for dealing with someone coming along later
who doesn't have in-state transportation rights and wants to get
on the project. He said one possibility is related to extra
capacity that may have been designed from the start or people
releasing capacity. The second possibility would revolve around
the need for expansion, and Mr. Loeffler noted that there are
three types of expansions.
12:00:55 PM
REPRESENTATIVE CRAWFORD said there is a provision that none of
the entities would be required to sell gas in state, and he said
he was told that the state will have 20 percent of the gas in-
kind, thus, the state could "fill those needs that are going to
be in state." He asked if it would be detrimental to the state
to sell that gas in state - whether other companies would make
more selling to Alberta, for example, than the state would by
fulfilling the in-state needs.
12:02:00 PM
MR. LOEFFLER answered as follows:
The amount of gas the state will have is 20 percent.
A rough calculation is ... 800 million cubic feet per
day, which is four times the current amount of in-
state use, according to some numbers I've seen. So,
yes, ... we heard that in the negotiations, the
state's going to have all this gas and it can sell it.
The next question is: [At] what price would the state
want to sell that gas? That's going to be for a
future administration to decide, but you ask whether
they would make more money taking it to Alberta - not
necessarily. The people who ship to Alberta have to
pay all the costs to Alberta, so they pay more to ship
it there. ... So, whoever sells it to ENSTAR [Natural
Gas Company], for example, should be able to knock off
the price in Alberta, the cost of shipping it beyond
Alaska.
... Number two, the question of whether ... the state
selling gas would want to reduce the price even
further to meet in-state deeds is a question that a
future state administration will have to settle. But
if you believe that it's all based on a netback, so
that the price in Alberta, for example, is the market
price, if you were selling in Alaska you could make as
much money if you wanted to, by knocking off the cost
of transportation to Alberta and selling it for that
lower amount, and it would work out the same as a
seller.
12:03:58 PM
REPRESENTATIVE CRAWFORD asked if the state, as 20 percent owners
of the pipeline taking a portion of the gas off the line in
Alaska, would still share in the profits of taking the rest of
the gas down the line to Alberta, or if, having taken the gas
out, that would go to the other shippers.
12:04:26 PM
MR. LOEFFLER answered that the state gets its 20 percent,
regardless, which he indicated is different from the way that
TAPS is set up. He explained that all the revenues on shipping
goes into one pot and Alaska gets 20 percent of that pot.
12:05:01 PM
REPRESENTATIVE SEATON directed attention to page 5 of the bill,
[subparagraph] (C), beginning on line 13, which read as follows:
(C) [(4)] the modification does not impair the
ability of the approved qualified project or the state
to meet the reasonably foreseeable demand in this
state for gas within economic proximity of the project
during the term of the contract developed under AS
43.82.020; and
REPRESENTATIVE SEATON said he would like clarification that
"this provision of law would be fulfilled by the terms of the
contract that ... you've just related."
12:05:58 PM
MR. LOEFFLER answered that that is his opinion. He stated, "I
don't have the bill in front of me, but listening to it as you
read it out, it seems to be an exact copy of what is [AS]
43.83.224. So, I don't know ... that we're modifying anything,
but restating existing law, and ... it's my opinion that the
requirements of the law are satisfied by the contract."
12:06:52 PM
REPRESENTATIVE LEDOUX directed attention to page 4, Section 6,
line 29, and she noted that timing and notice provisions were to
be deleted from the language. She asked for confirmation that
that change would make the language broader.
12:07:38 PM
MR. DONOHUE confirmed that is so. He said the original intent
of [AS 43.82.220] was restricted to the right of the
commissioner to negotiate changes to royalty in-kind rules and
royalty evaluation rules. This set of amendments broadens the
language to "deal with the ability to negotiate modifications to
other portions of the oil and gas lease agreement and unit
agreements, and what have you." He specified that a broader
authority is being sought.
12:08:18 PM
REPRESENTATIVE LEDOUX turned back to the handout with answers to
questions, and brought attention to the answer to question 2,
which read:
This administration does not view the fiscal contract
as allowing for any material amendments to the tax
related provisions.
REPRESENTATIVE LeDOUX asked if that answer is the
administration's moral view of the contract, or if it's a legal
view of the contract.
12:08:52 PM
MR. JARDELL answered as follows:
The view of the administration is that the taxing
power is a legislative power by constitution and that
you cannot delegate that to the state administration
to change that. We don't have the constitutional
authority, and it's very clear through the Stranded
Gas Act. And I think if you look at the discussion
when the legislature added legislative ratification
... they added legislative ratification to the
original Stranded Gas Act [because] it had to do with
the taxation powers and the need for the legislature
to weigh in on taxation. And so we do not view the
administration as having the ability to negotiate tax
rates to change this. However, we went back into
researching it, as good attorneys do. They said, "You
know I can certainly make an argument that the
contract allows it, in which case somebody could try
it, and then you could go to the court and see what
the [Alaska] Supreme Court says. And so, what we've
done is recognized that to ... provide a comfort
factor, there is a solution to kind of do a "belts-
and-suspenders" and say very clearly, "You can't do
it."
12:10:11 PM
REPRESENTATIVE LEDOUX asked for an example of an immaterial
amendment.
12:10:46 PM
MR. DONOHUE stated his belief that the general provision to
allow for amendments to the contract would deal with things like
who to notify when a dispute begins. If some entity is sold to
another, an amendment that is administrative in nature would be
necessary to ensure that the project goes forward with the new
entity.
REPRESENTATIVE LEDOUX pointed out that the answer to question 2
in the handout refers to "material amendments to the tax-related
provisions." She explained that her prior question had been an
effort to find out the definition of immaterial amendments
relating to tax-related provisions.
12:11:42 PM
MR. DONOHUE responded that he can't think off-hand of an
example, but he suggested that possibly a creation of a new
political subdivision might require redistribution of some of
the PILT payments. He indicated that an immaterial amendment
would be administrative and would not affect the "total
obligations running ... to and from the parties."
12:12:52 PM
REPRESENTATIVE LEDOUX expressed concern over leaving "wiggle
room" in tax provisions.
12:13:10 PM
MR. DONOHUE responded:
Again, the language we've proposed would not have a
materiality standard; it would simply say, "If you
change a tax provision, it would be subject to
reauthorization by the legislature."
12:13:28 PM
REPRESENTATIVE SEATON referred to the previously noted deletion
from Section 6, on page 4 of the bill and asked Mr. Donohue what
provisions other than those related to timing and notice he
anticipates could change.
12:14:15 PM
MR. DONOHUE explained that the provision for contract
administration and notice under Article 30 of the contract is a
standard provision for when parties enter into a deal, and he
indicated it relates to categories such as change of address,
phone number, or company name.
12:14:55 PM
REPRESENTATIVE SEATON said he is confused. He referred back to
Section 6 and said, "... We're taking out, on line 29, ...
timing and notice provisions." He said the resulting language
would allow the modification of provisions of the applicable oil
and gas leases. He explained, "So, what I'm trying to do is
figure out what are the provisions to the oil and gas leases
that this will now allow modification?"
12:15:51 PM
MR. DONOHUE said the answer to question 3 in the handout is a
general one. He said, "This outlines the primary modifications
of lease and unit agreement terms that are presently
incorporated in the proposed fiscal contract." He continued:
The deletion of the term, "timing and notice," ... on
page 4, line 29, that you're referring to ... is a
specific reference to the royalty in-kind, royalty in-
value provisions in which the state has to provide
several months' notice before it changes the form in
which it receives its royalties. This deletion of
this ... particular timing notice was ... a
consistency edit to make it clear that not just RIK
[royalty in-kind] provisions can be modified by the
contract, but [also] other provisions in the oil and
gas leases and unit agreements.
Perhaps what your question is: With the modification
that we're proposing to [AS] 43.82.435, the issue
might arise, "Well, what if the future administration
wants to make further modifications to oil and gas
leases that are not in the current proposed contract?"
And the answer would be, "This legislation ... would
allow modifications of those terms in subsequent years
without coming back to the legislature."
12:17:52 PM
REPRESENTATIVE SEATON asked if changes in royalties would be
considered modifications to the oil and gas leases, or something
separate.
12:18:06 PM
MR. DONOHUE replied that under the proposed contract, the state
has agreed "to take its royalty in-kind," thus there would be no
opportunity to renegotiate royalty valuation methodologies, for
example.
12:18:31 PM
REPRESENTATIVE SEATON asked Mr. Donohue to confirm that he is
saying what would be allowed under the new provision is
contained in the answer to question 3.
12:18:59 PM
MR. DONOHUE clarified:
My testimony is that the answer to [question] 3 is a
summary of the primary modifications to leases and
unit agreements that are [contemplated] by the
existing proposed fiscal contract to the extent that
there's an amendment opportunity provided in Article
39 and you're foreclosing the use of that amendment
opportunity for tax PILTS.
The issue remains whether or not some royalty
provisions, further modifications of lease agreements,
could be entered into subsequent to the authorization;
that would not be addressed by this legislation.
12:19:39 PM
REPRESENTATIVE SEATON asked Mr. Donohue if he could give the
committee a list of those modifications that would be possible
to oil and gas leases under the new language adopted through the
change of Section 6.
12:20:21 PM
MR. JARDELL said the administration would provide a list of
possible parameters, as well as a more detailed explanation of
what is in the contract for which the administration thinks it
needs authority.
12:21:08 PM
MR. DONOHUE, in response to a question from Representative
Neuman, offered his belief that progressivity rates are related
to the PPT negotiations.
The committee took an at-ease from 12:21:58 PM to 12:32:35 PM.
12:33:55 PM
DAVID VAN TUYL, Commercial Manager, Alaska Gas, BP, said he
would attempt to add context to yesterday's conversation about
the various options available in providing an unknown in-state
demand. He recalled that Mr. Loeffler had mentioned that a
local distribution company (LDC), such as ENSTAR Natural Gas
Company would have the opportunity to talk to "the pipeline" at
the time of the open season with a view to getting a
specifically structured service. He said that is commonly done.
He noted that such consultation can actually take place before
the open season. In response to a question from Chair Samuels,
he explained that there is a specific process within the FERC
construct, whereby the pipeline company has to make itself
available to potential participants in the open season, prior to
the open season, on a consultative basis. That, he said, would
be the first opportunity an LDC would have to make its wishes
known, so that perhaps during the open season the pipeline
company may offer the specific service that a local distribution
company had in mind, rather than, during the open season,
saying, "I have something different in mind that's not the
service you're offering."
MR. VAN TUYL reviewed the following eight options: First, the
local distribution company buys its ultimate anticipated demand
and any amount not used can be released back to "the pipeline,"
which could then auction it off to other interested parties. In
response to a question from Representative Seaton, he clarified
that all the options are related to capacity. He continued with
the options, the next two being related: Second, the entity
could negotiate a seasonal transportation services agreement or
"structured capacity," which would allow varying capacities over
periods of time. Third, the entity could negotiate a
transportation services agreement that has a limited term, but
with renewal rights built into it. Fourth, a local distribution
company can negotiate an agreement that allows incremental
increases at the shipper's option. The local distribution
company would pay a premium for that option. He inserted: "I
believe all of these services would be cheaper than purchasing
long-haul capacity all the way to Alberta to accommodate the
same thing." He continued with the list: Fifth, a local
distribution company could contract with a third party that has
capacity. Sixth, the entity could take advantage of authorized
overrun service - a service often offered by pipeline companies
in the north. A pipeline company will offer for firm
transportation service what it is confident it can make
available daily and long term. He offered further details.
12:42:24 PM
MR. VAN TUYL, in response to a question from Co-Chair Samuels,
confirmed that, in general, there is more capacity with
authorized overrun service in the winter because compressors
work more efficiently when the gas is cold and the outside
ambient temperature is cold, and presumably that is when peak
demand would occur in a place such as Fairbanks.
12:42:43 PM
MR. VAN TUYL, in response to a question from Representative
Seaton related to temperature variation, explained that the
pipeline is carefully designed so that the temperature is
neither too hot nor too cold. The compressors are above ground,
but the ambient temperature impacts the efficiency of the
compressors.
MR. VAN TUYL returned to his list of options. Seventh, a
pipeline service may offer interruptible transportation service.
He explained, "If someone else needs that capacity, then the
person buying the interruptible transportation would -- that
capacity would get called from them. They'd be able to make use
of it in the meantime. It's generally less expensive, because
someone else has a call right on it." The eighth option is to
expand the system itself overall, in which case, he said, there
would be a (indisc.) open season, when local distribution
companies would be able to go through the process again, state
their needs, and bid for capacity accordingly.
12:44:33 PM
CO-CHAIR SAMUELS asked if there is a menu listing the options
for the buyers to view. He also asked who makes the decisions.
12:44:58 PM
MR. VAN TUYL responded that the pipeline company will make the
decisions as to what sort of service it offers; however, any
customer also has recourse with the regulatory body, which in
this case is FERC. As Mr. Loeffler had mentioned, he said the
opportunity to bid for capacity after open season is totally
unprecedented.
MR. VAN TUYL continued to discuss related points. He mentioned
Mr. Loeffler's summation of the various provisions in Article 9
of the contract that relate to facilitating getting in-state gas
through off-take points, doing an in-state needs study, and
having a mileage-sensitive service offered for Alaska, and
requiring cooperation with local distribution companies to bring
that gas in state. He noted that there is language within
Article 9 that says no party is obligated to provide gas for in-
state use. He noted that the provision goes on to say, "but any
party may supply [gas]." He said BP has an interest in bringing
energy to customers and would certainly compete for any
opportunity to supply gas to customers.
12:47:22 PM
CO-CHAIR RAMRAS noted that of the eight options, some cost more
than others. He asked if a study would be able to rate those
options to find which has a lower premium for the user.
Regarding the contract, he asked, "Who is Pipe Co. looking out
for? Are they looking out for the consumer, or ... is Pipe Co.
part of the ... Alaska Natural Gas Company - whatever the larger
entity is?"
12:50:10 PM
MR. VAN TUYL responded that there will be opportunity to look at
those issues and make estimates, but he emphasized that any such
analysis would be an estimate.
12:51:27 PM
MR. VAN TUYL, in response to Co-Chair Samuels, addressed sliding
scales versus [net profit share leases] NPSLs, the latter of
which he said would be left unchanged by the contract.
CO-CHAIR SAMUELS asked what the percentage of leases have "net
profit share on them."
MR. VAN TUYL answered that he doesn't know, but he estimated
that it is a small, single-digit percentage. He said there is a
fixed royalty, which, for example, is 12.5 percent at Prudhoe
Bay. On top of that, he said, certain leases have an
incremental royalty, and there are three types: a sliding scale
lease; net profit shares, which have a "step up" in the royalty
rate once payout occurs; and supplemental royalties, as exist at
the Northstar Unit. He said the contract provides for
conversion of sliding scale leases to a fixed royalty
percentage.
12:53:22 PM
WENDY KING, Director, External Strategies, ANS Gas Development,
ConocoPhillips Alaska, Inc., pointed out that at 12.2(c) in the
contract there is conversion for sliding scale leases. She
explained that a sliding scale lease - at least those of
ConocoPhillips Alaska, Inc. - is dependent upon the price of
crude to determine the royalty rate. Ms. King, in response to
Co-Chair Samuels, said she doesn't know what the range is, but
she noted that the reference price is directly from the lease.
She said there may be a point in time when ConocoPhillips
Alaska, Inc. wants to produce gas from a certain field, and in
the RIK world, a variable royalty changing with time makes it
difficult to book capacity. She explained, "So, what we put in
here was an option to say, ... 'If we decide to produce gas from
that field, ... we'll go grab what the historic prices has been
for those previous six months and you have the option to convert
that to a fixed royalty percent - to just facilitate fixed
royalty in-kind coming up in time."
CO-CHAIR SAMUELS asked, "The industry has the option, or the
state has the option?"
MS. KING answered:
It's upon notice by a producer, so it's our option to
say, "We would like to convert this to a fixed royalty
percent, and here's what the price has been. There's
methodology clearly outlined in here using the same
price marker that would have been with the new lease
provisions to just convert that over." And it is for
a small portion of leases, as I highlighted before,
and ... specifically the reference in here ... to
12.2(c) is to facilitate converting those sliding
scales over to a fixed royalty rate percent.
12:55:19 PM
REPRESENTATIVE SEATON asked, "And so that's a 12-month look-back
at prices from whatever time the industry decides for that lease
that they want to start production, or even ... just apply at
any time during the lease?"
12:55:35 PM
MS. KING responded that there is requirement that an entity has
to be capable of delivering gas from "that asset" within 365
days of making the notice. Regarding Co-Chair Ramras' previous
comments, she stated:
If we know that there's going to be off-take at any
initial open season in state, ... the engineers will
account for that in the design. And that is why,
sometimes if you use the term "telescoping," that's
not exactly an accurate term, because - ... for the
order or magnitude of the volumes that we're talking
about - you won't change the pipe size, but you'll
change maybe your compressor stations at different
places along -- to accommodate some off-take in state.
So, that's exactly why, in mileage-sensitive service,
part of that initial open season can offer a distinct
cost advantage, is that we designed that from the very
beginning. And so, I just wanted to ... highlight
that point to make sure it was clear why there was a
difference between the initial open season and
afterwards.
MS. KING stated that Article 8.8 addresses authorized overrun
service, and the language there ensures that if the pipeline
[company] chooses to offer authorized overrun service, it be
allocated in a nondiscriminatory fashion. She offered further
details.
12:58:19 PM
CO-CHAIR RAMRAS asked if it would be worthwhile to direct
authorized overrun service toward in-state service first.
MS. KING replied that that decision would be one for the state
to make with respect to its capacity holdings.
MR. VAN TUYL added that it is up to each individual shipper to
determine how it uses its capacity to be able to match its
markets to meet its gas supplies, and that would include its use
of authorized overrun service or IT interruptible
transportation, if it was made available.
12:59:21 PM
REPRESENTATIVE SEATON, returning to the discussion of conversion
and the sliding scale, asked if it has to be done at the initial
start up of the field or can it be done at any time.
12:59:44 PM
MS. KING answered that the conversion itself is "upon notice
from the producer" that gas will be delivered within a year.
She clarified, "You can make the conversion at any time, but if
you haven't produced gas from that field within a year, then
that provision would go away, you'd have to re-notice again if
you haven't delivered gas within that time frame."
1:00:17 PM
CO-CHAIR SAMUELS asked if the Alaska Oil and Gas Conservation
Commission (AOGCC) gets involved in the process.
1:01:01 PM
MR. VAN TUYL explained that AOGCC will typically establish
"pool" rules for an entire field - a maximum efficient rate for
the entire pool - and the operator of each unit will provide a
plan of development that must be consistent with DNR's
regulations, as well as the regulations set by AOGCC.
1:02:32 PM
MS. KING, in response to a question from Representative Seaton,
reviewed that when gas is expected to be produced from a field,
the entity would send notice "for that provision" and then be
required to deliver the actual gas within 365 days. She
continued:
I would struggle as to why you wouldn't do right when
you ... think you're going to start gas production,
because the very issue you were trying to solve is:
capacity doesn't work on a variable basis. So, if I'm
fluctuating how much royalty gas there is with oil
prices, it's difficult to ... manage the capacity in
the total production from the field. So, it would
seem to me ..., if this was your choice to exercise
this option, you'd want to do that right when you
start producing gas.
1:04:02 PM
MR. VAN TUYL noted for Representative Seaton that Section 6 is
the language in the bill related to [AS] 43.82.220(a), as
amended, and it provides for a broader revision to the terms of
the oil and gas leases. To emphasize Ms. King's point, he
stated:
The whole reason we created the defined term,
"incremental royalty" in the contract, and set that
aside from "fixed royalty," was to facilitate this
whole capacity management. The incremental royalty is
going to be the gas taken in-kind. The NPSLs that
have ... a fixed royalty is the gas taken in-kind.
The incremental royalty that's above the fixed royalty
would be paid in cash, specifically to avoid the
problem, as they vary around, "How do I handle
capacity that's, you know, one month it's up, one
month it's down?"
1:04:55 PM
CO-CHAIR SAMUELS announced that he would open public testimony
the following morning. He reviewed the schedule for hearing the
bill.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 1:05:55
PM.
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