Legislature(2005 - 2006)CAPITOL 124
06/03/2006 08:30 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB2004 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2004 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
June 3, 2006
8:33 a.m.
MEMBERS PRESENT
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Paul Seaton, Vice Chair
Representative Jim Elkins
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Harry Crawford
Representative Mary Kapsner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mark Neuman
Representative Beth Kerttula
Representative David Guttenberg
Representative John Coghill
Representative Peggy Wilson
Representative Pete Kott
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."
- MOVED CSHB 2004(RES) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 2004
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
06/02/06 (H) Heard & Held
06/02/06 (H) MINUTE(RES)
06/03/06 (H) RES AT 8:30 AM CAPITOL 124
WITNESS REGISTER
DAN DICKINSON, CPA
(No address provided)
POSITION STATEMENT: During discussion of HB 2004, as a
consultant for the Department of Revenue (DOR), responded to
questions on behalf of the administration.
DAVID VAN TUYL, Commercial Manager
Alaska Gas Group
BP Exploration (Alaska) Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 2004, and
responded to a question.
KEN GRIFFIN, Acting Deputy Commissioner
Anchorage Office
Office of the Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Responded to questions during discussion of
HB 2004.
JOSEPH K. DONOHUE, Attorney at Law
Preston Gates & Ellis
Anchorage, Alaska
POSITION STATEMENT: On behalf of the administration, responded
to questions during discussion of HB 2004.
KEVIN JARDELL, Legislative Liaison
Governor's Legislative Office
Office of the Governor
Juneau, Alaska
POSITION STATEMENT: On behalf of the administration, responded
to questions during discussion of HB 2004.
ACTION NARRATIVE
CO-CHAIR RALPH SAMUELS called the House Resources Standing
Committee meeting to order at 8:33:43 AM. Representatives
Samuels, Elkins, Gatto, LeDoux, and Seaton were present at the
call to order. Representatives Ramras, Olson, Crawford, and
Kapsner arrived as the meeting was in progress. Representatives
Coghill, Neuman, Wilson, Guttenberg, and Kott were also in
attendance.
HB 2004 - STRANDED GAS DEVELOPMENT ACT AMENDMENTS
[Contains brief mention of HB 2003.]
CO-CHAIR SAMUELS announced that the first 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."
8:34:41 AM
DAN DICKINSON, CPA, in response to a question, after relaying
that he is the former director of the Tax Division of the
Department of Revenue (DOR) but is currently acting as
consultant to the DOR, said that if a limited liability company
(LLC) - such as the proposed Pipeline Project Mainline Limited
Liability Company Entity ("Mainline LLC") - asks to be treated
as a "pass through entity," then the various elements of income
will be passed onto the owners; in terms of the Mainline LLC,
the three corporations involved in the Alaska Stranded Gas
Fiscal Contract ("ASGF Contract") as owners in the project would
be BP Exploration (Alaska) Inc., ConocoPhillips Alaska, Inc.,
and ExxonMobil Alaska Production, Inc., and these three
corporations would partner with the State of Alaska - the fourth
member/owner of the Mainline LLC. Eventually all income will
end up at a taxable entity, though the entity may only be
subject to federal taxes. With regard to the Mainline LLC, the
three corporations would be taxable - forming part of the
"unitary group" that would be taxed - and the State of Alaska
would not be subject to state taxes.
MR. DICKINSON added that if any of the individual members of the
Mainline LLC changed their structure or "moved into a different
structure," as long as the new structure was taxable, the
elements of income would flow through and be reportable and be
taxed. In response to other questions, he said that the
individual corporations will have a nexus with the state, and
the state will "pull in anyone engaged in the oil and gas
business," and will look at the "unitary business," the
worldwide income of that unitary business, and any [related]
entity; furthermore, in determining how much income flows to
Alaska, the assets that the [Mainline LLC] owns [in Alaska] will
form part of the numerator.
8:39:25 AM
MR. DICKINSON, in response to further questions, explained that
if an individual wanted to own the pipeline - though such is a
fairly farfetched notion - he/she would not be taxed; again,
though, "pass through" entities would be taxed. However, if the
state wanted to be able to tax an individual who owns the
pipeline without first passing an income tax, the legislature
could institute a tax on "corporate" persons. He again offered
his belief that it is unlikely that an individual would
undertake to own the pipeline.
REPRESENTATIVE LeDOUX asked whether the ASGF Contract prohibits
passage of a tax on corporate persons.
MR. DICKINSON offered his understanding that the legislature can
pass whatever taxes it wishes; that the ASGF Contract exempts
participants from certain of those taxes; and that if "an
additional person" acquires certain assets controlled by one of
the corporations, under Article 31.1(d) of the ASGF Contract,
he/she would still be subject to corporate income tax. He noted
that Article 31.1(d) reads:
(d) Conditions Regarding Additional Person. For an
Additional Person, the exemption and covenants
provided in the Contract are limited to Taxes, other
than SCIT, on that portion of the Project that has
been assumed by the Additional Person.
MR. DICKINSON explained that "SCIT" is defined as any tax
imposed on or measured by net income. In response to a
question, he said that in determining taxes, the state will be
looking at "what's the unitary group, and who's engaged in oil
and gas and pipeline business in the state of Alaska"; that's
who will be dealt with, either under the terms of the contract
or under tax law, and the form by which "those affiliates"
relate to one another - in terms of paying dividends - is fairly
immaterial.
MR. DICKINSON, in response to another question, indicated that a
"unitary business" is the larger entity and not just an LLC, and
the Alaska taxes would be determined by how much property is
owned in the state, and the sales in Alaska - typically the
tariffs charged.
CO-CHAIR RAMRAS offered his understanding that corporate
entities, regardless of whether they are an LLC, must pay a
corporate income tax.
MR. DICKINSON concurred, and, in response to comments, offered
his belief that the ASGF Contract is structured such that tax
evasion by the corporations is unlikely to occur. In response
to a question, he indicated that he is not familiar with how
"Lloyd's" operates.
8:56:00 AM
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP
Exploration (Alaska) Inc., said:
We support the intent behind the bill which provides
amendments to the [Alaska] Stranded Gas Development
Act, and believe this bill will help progress the gas
pipeline fiscal contract. The administration did a
good job in structuring these amendments and
explaining them to this committee. However, there is
one point that we see a bit differently than the
administration and I'd like to take just a moment to
clarify for the record. I believe the administration
stated that the amendment to [AS 43.82.220(a)(2)] ...
that allows for the inclusion of terms in the contract
related to the state reimbursing the producers for
certain upstream costs was required because this was
not a right the producers currently hold under either
existing lease or unit agreements.
We don't agree. In old form leases - known as "DL-1"
leases - the state is obligated to pay for upstream
costs associated with any of its gas it takes in-kind.
So we feel that this is a lease right associated with
... these DL-1 leases, and the vast majority of the
known North Slope gas resource, around 90 percent, is
found on these DL-1 leases. The fiscal contract and
the amendments to HB 2004 simply [extend] that
existing lease right to all gas from all leases.
So to conclude my brief comments, I want to emphasize
that [BP Exploration (Alaska) Inc.] stands ready,
willing, and able to advance the gas pipeline project,
along with our partners, [ConocoPhillips Alaska, Inc.,
ExxonMobil Alaska Production, Inc.,] and the State of
Alaska. The [ASGF Contract], coupled with HB 2004,
makes that objective possible; BP also stands ready to
work with the legislature as you complete your work on
this bill.
We support passage of HB 2004, and then encourage the
legislature to approve the [ASGF Contract] to enable
all Alaskans to benefit from one of the largest energy
projects on the planet. Thank you for the opportunity
to testify, and I'd be happy to try [to] ... answer
any questions that you might have.
MR. VAN TUYL, in response to a question, said the ASGF Contract
provides for delivery of gas at the delivery points, at either
the lease boundary or the first midstream element, though he
does not know, specifically, what the lease terms call for
relative to merchantable condition, but would be willing to
research that issue further. What he was referring to earlier,
he remarked, were the specific provisions of the DL-1 leases
that call for reimbursement of upstream costs associated with
processing gas - separating oil, water, and gas - to deliver it
from a lease.
9:01:19 AM
KEN GRIFFIN, Acting Deputy Commissioner, Anchorage Office,
Office of the Commissioner, Department of Natural Resources
(DNR), in response to a question, referred to proposed AS
43.82.020(2) of HB 2004, and said that the terms affecting the
lease agreements, unit agreements, and other agreements referred
to therein are varied. The adjustments referred to can affect
upstream state royalty; gas responsibilities; the
responsibilities for the costs of conditioning and the disposal
of impurities; royalty in-kind (RIK) and royalty in-value (RIV)
switching; the point at which royalty gas is taken; the
calculation of sliding-scale royalties; and approval of unit
plans of development, particularly at the Point Thompson unit.
Much of the time, a group of leases are incorporated into a
unit, and the process for calculating the unit royalty is in the
unit agreement; thus, if [the unit royalty] is affected by this
provision, so too will the unit agreement be affected.
9:04:46 AM
MR. GRIFFIN indicated that the language, "other agreements" is
intended to ensure that agreements are aligned and consistent
with the ASGF Contract. The authority being granted by this
provision is the authority to negotiate [what has already been
negotiated] in the ASGF Contract, and the result of "these
changes" will come before the Legislature for final
ratification. He assured the committee that this is not an open
carte blanche for continual renegotiation or revision once the
ASGF Contract has been approved by the legislature and then
executed. In response to a question, he indicated that after
the ASGF Contract is executed, any further proposed changes must
be brought before the legislature and approved; under proposed
AS 43.82.020, the legislature would simply be providing the
authority necessary to bring the existing draft ASGF Contract
forward for legislative consideration.
REPRESENTATIVE SEATON pondered whether the legislature ought to
seek confirmation of that with Department of Law.
MR. GRIFFIN acknowledged that point. In response to a question,
he said he is focusing on his understanding of the intent behind
the aforementioned language. There are number of provisions
throughout the ASGF Contract that affect lease terms, and -
particularly given that the administration does not agree with
the producers' interpretation of some of the DL-1 lease
provisions - HB 2004 is simply "clearing the deck" to allow what
has [already] been negotiated in the ASGF Contract to be brought
before the legislature. Again, once the ASGF Contract is
executed, negotiations are finished, and should further changes
be necessary, they would have to be brought before the
legislature for additional approval. He noted that although
producers do have the right to arbitrate under the terms of the
ASGF Contract, no changes beyond the scope of Article 41.2 of
the ASGF Contract is authorized.
9:12:42 AM
JOSEPH K. DONOHUE, Attorney at Law, Preston Gates & Ellis, on
behalf of the administration, in response to a question, relayed
that proposed AS 43.82.210(a)(8) gives the statutory authority
for the provisions of the ASGF Contract to provide an exemption
to a reserves tax should such be enacted by initiative, and
offered his belief that such an exemption would supersede any
other law pertaining to a reserves tax - whether adopted by
initiative or statute - though the ASGF Contract itself would
not necessarily circumvent the people's or the state's power to
adopt a reserves tax; rather, if such a tax is adopted, the ASGF
Contract simply provides an exemption from it.
9:18:06 AM
KEVIN JARDELL, Legislative Liaison, Governor's Legislative
Office, Office of the Governor, in response to comments and a
question, said:
"Diligence" is a term that's used quite often, and I
think there's a lot of reason to believe that that's
[a] well-defined term and one that through
negotiations ... did provide quite strong relief - if
the companies are not pursuing the pipeline - to
terminate the agreement. One of the things that was
great about the ... legislature's action of adopting
the [Alaska Stranded Gas Development Act] was the
process that it put in place. And that process
provides that there will be legislative input and
public input on [a] draft contract. Certainly we are
getting quite a bit of that, and some of that relates
to the diligence standard and the work commitments.
We've received, from your consultants, documents of
recent release that [talk] about it; we're ...
currently responding to those, working through them,
and we're not dismissing them ... [but rather
reviewing them]. The direction from the legislature
is that we take that input, we consider it, and the
commissioner of [the DOR] - if he believes that ...
[change is needed] - can enter into negotiations to
make those needed changes. So that input is needed -
we believe that the contract currently has sufficient
standards - but we are taking the input from the
public and ... the legislature very seriously in
considering those things as we move through this
process.
9:20:22 AM
MR. JARDELL, in response to comments, opined that the current
process gives the public sufficient opportunity to provide input
regarding which provisions of the contract are acceptable and
which aren't. He spoke of Governor Knowles's transmittal letter
- which he said focused on the need to waive state, municipal,
and local taxes - and of the "original task force," and then
posited that the task force recognized that in order to make the
project economic and get the gas to market, the economic
structure needed to be changed; during the negotiation process,
it became clear to the administration that the aforementioned
reserves tax was a significant economic change that would have
to be addressed, just as the issue of state, municipal, and
local taxes had to be addressed via the Alaska Stranded Gas
Development Act.
MR. JARDELL indicated that the issue of taxes is addressed in
the ASGF Contract such that taxes will not be allowed to harm
the project; if the project is not pursued diligently, however,
the producers will have to begin paying [taxes], and the
administration feels that such a provision is necessary. He
cautioned against trying to change the terms of the ASGF
Contract prior to hearing public testimony regarding its terms.
In conclusion, he proffered that the amendments proposed via HB
2004 to the Alaska Stranded Gas Development Act are within the
context and intent of that original Act.
MR. JARDELL, in response to a comment, noted that the
administration is conducting hearings throughout the state on
the ASGF Contract, and reiterated that the changes proposed via
HB 2004 ensure that the ASGF Contract has the necessary
authority to move forward and ultimately come before the
legislature for approval. The administration views HB 2004 as a
cleanup measure necessary to continue the viability of the
Alaska Stranded Gas Development Act and the purpose of the Act,
that being to negotiate a deal that would get the gas to market,
present that deal to the public and the legislature, and obtain
legislative approval. In response to a question, he said that
information about the ASGF Contract is being given to, and input
received from, the public via electronic, written, telephonic,
and in-person means.
MR. DONOHUE, in response to questions, reiterated his comments
regarding proposed AS 43.82.210(a)(8), and Mr. Griffin's
comments regarding the authority granted by the bill and
possible future changes that might be necessary.
MR. JARDELL, in response to a question, said that neither
existing law nor HB 2004 thwart the municipality's or state's
ability to tax, though the ASGF Contract, if approved, will. In
response to another question, he said:
The direction given to us by the legislature was to go
out and negotiate a deal. We have done that. And we
have brought back a deal that over 35 years at $5.5
gas will return $105 billion to the state of Alaska,
that in addition will, we believe, increase the
production of our [Trans-Alaska Pipeline System
(TAPS)] ... - whose production's been declining for
some years now; it'll extend the life of [the] TAPS
for 20 to 30 years, and ... change the entire
structure of the North Slope. This is the State's
long term fiscal interest plan.
And we ... were told by the legislature to go out and
negotiate it. We have come back to you with a
negotiated deal that gets the gas to market. We
understand [there are] a lot of provisions here that
people are not going to like. ... When you go out and
negotiate a deal, you don't get everything you like;
we set forth goals of what we thought the state needed
to get in order to get a contract - what we thought
was a fair deal. Revenue was a big part of it. We
did things such as take in gas in-kind; it was because
that was the only option available to us to preserve
our revenue, to preserve the opportunity for revenue,
and bump up the internal rate of return to make it a
viable project.
There are a lot of things in here that we negotiated
to get to what we wanted and some things that we had
to compromise in the middle on, and we understand,
absolutely, that this is a tough decision ...; there
are parts of it that ... people out there aren't going
to like, but there's a lot of it that people are
[going to like].
MR. JARDELL indicated that if, after the public process is
concluded, the legislature ultimately disapproves of the terms
of the ASGF Contract, a different course can then be pursued.
CO-CHAIR RAMRAS remarked that a memorandum from Daniel Johnston
suggests that the state, through various concessions, is
actually going to pay for the gas pipeline. Co-Chair Ramras
said he does not question that the state would benefit from $105
billion over the next 35 years. However, isn't it also fair to
say that the state will be subsidizing the cost of the project
to the tune of $30 billion?
MR. JARDELL indicated that others could more appropriately speak
to "the offsets" that will occur due to the sharing of expenses
and to some of the credits currently being offered. "Absolutely
we are going to share in the costs; it's part of the balancing
act of making the project viable, as directed by the
legislature, to bring this [gas] to market," he added. In the
end, that balancing provides for a project that otherwise would
not exist, that gets Alaska's gas to market, that complies with
the Alaska Stranded Gas Development Act, and that puts a
contract to market Alaska's gas in front of the state's citizens
so that they can decide whether this shall be the way of
proceeding.
9:37:36 AM
REPRESENTATIVE CRAWFORD offered his understanding that the
reserves tax was anticipated when the Alaska Stranded Gas
Development Act was written; that Representatives Whitaker and
Croft introduced a reserves tax in 1998; and that Representative
Whitaker was one of the authors of the Alaska Stranded Gas
Development Act and he always expected to have such a tax in
order to use it as a tool to help force construction of the
[gas] pipeline and keep it from being delayed. Representative
Crawford characterized the reserves tax as providing "earnest
money" to ensure that producers diligently pursue such a
project. Under the terms of the ASGF Contract, he opined, any
"diligence provisions" are virtually non-existent. "We want to
have the reserves tax there so that there's an actual financial
penalty if, at some point, the oil companies decide that they
want to pull out of this project or ... [if] they don't get
[the] job done; what we want are clear guidelines with
benchmarks ... that we can see," he added, and if the producers
meet those guidelines, they will get all of the reserves taxes
back; hence, a reserves tax would act as an incentive
encouraging the producers to act quickly.
MR. JARDELL clarified that Representative Whitaker was not in
office when the Alaska Stranded Gas Development Act was
introduced and adopted, but acknowledged that he can't recall
whether at that time there were discussions regarding a reserves
tax. He added that the administration's viewpoint is that a
reserves tax "will kill the gas pipeline and prevent us from
getting that gas to market."
REPRESENTATIVE SEATON pointed out that should a reserves tax be
passed by the voters, the legislature has ability to repeal it
after two years. He also pointed out that in negotiating a
contract, the administration went well outside the parameters
that had been set for such negotiations. He opined that it is
presumptuous of the administration to ask for the power to
"change the initiative before it passes"; furthermore, according
to a May 29 memorandum from Barnes & Casio, LLP, Article 5 of
the ASGF Contract contains a termination process that will be
virtually impossible for the legislature to make use of. He
questioned how such constraints can be justified.
9:43:12 AM
CO-CHAIR SAMUELS pointed out that if an indemnification of a
reserves tax is added to the ASGF Contract and it's a big enough
sticking point with enough legislators, the legislature can vote
"No" on the contract. He suggested that what should be
considered at this point in time is what tools shall the
incoming administration be left with; for example, should the
next administration be able to take gas in-kind or be able to
use arbitration. He offered his recollection that no members
voted against either the Alaska Stranded Gas Development Act or
the subsequent amendments to it, adding that [the legislature]
needs to be careful about which tools are taken away from the
new administration.
MR. JARDELL, in response to Representative Seaton, acknowledged
that the administration has come before the legislature asking
that the scope of what it would be allowed to do regarding the
negotiations be expanded, but argued that everything the
administration is asking for is in line with the purpose and
intent of the Alaska Stranded Gas Development Act. With regard
to the proposed initiative on a reserves tax, he assured the
committee that the administration doesn't want to thwart the
will of the people and would in fact like the people to weigh in
on the issue as it pertains to the inclusion of an
indemnification clause in the ASGF Contract. He noted that the
terms of the ASGF Contract won't actually be changing the
initiative, and that it will be up to the courts to ultimately
decide, should the initiative on a reserves tax pass, whether an
indemnification clause would supersede it. He also noted that
the legislature could choose to refund the producers, in the
form of tax credits, the amount of a reserves tax.
REPRESENTATIVE SEATON asked for clarification regarding the
state's inability to get out of the ASGF Contract, specifically
in light of the contract's provisions regarding indemnification
against a reserves tax and preclusion of an increase in taxes
for the life of the contract.
MR. JARDELL acknowledged that if the opinion expressed in the
aforementioned memorandum is true, than it does raise a valid
concern. He asked the committee to give the administration the
authority - via HB 2004 - to renegotiate the ASGF Contract to
the legislature's satisfaction.
REPRESENTATIVE GATTO expressed discomfort with the provision in
the contract that would indemnify producers against a reserves
tax passed by initiative, because such a provision would thwart
the will of the people.
9:55:22 AM
REPRESENTATIVE LeDOUX drew attention to proposed AS
43.82.210(a)(4)-(6), and asked what municipalities are currently
levying the taxes referred to in that language.
MR. JARDELL said he didn't have that information available at
this time, but would endeavor to provide it later.
CO-CHAIR SAMUELS, after ascertaining that no one else wished to
testify, closed public testimony on HB 2004, and recessed the
House Resources Standing Committee at 9:56 a.m.
CO-CHAIR SAMUELS called the House Resources Standing Committee
meeting back to order at 2:34:11 PM. Representatives Samuels,
Ramras, Seaton, Olson, Gatto, and Elkins were present at the
call back to order. Representatives LeDoux, Crawford, and
Kapsner arrived as the reconvened meeting was in progress.
Representatives Neuman, Kerttula, and Guttenberg were also in
attendance.
CO-CHAIR SAMUELS referred to Amendment 1, which read [original
punctuation provided but formatting changed]:
Page 4, Line 29: after "suit" insert "including
arbitration".
Page 4, Line 31 - Page 5, Line 1: Delete" granted in
this subsection" and insert the following in its place
"to enter and enforce an arbitration award in a state
other than Alaska".
2:34:57 PM
[A motion to move the bill from committee was ignored.]
REPRESENTATIVE SEATON made a motion to adopt Amendment 1.
CO-CHAIR SAMUELS objected for the purpose of discussion.
MR. JARDELL explained that Amendment 1 would clarify Section 4;
as currently written, Section 4 would preclude the use of
arbitration prior to receiving an arbitrator's award, and this
doesn't make sense given that an arbitrator's award would not be
given until arbitration was entered into. Amendment 1 would
clarify that the State can enter into arbitration and utilize
the arbitration process.
CO-CHAIR SAMUELS noted that as currently written, Amendment 1
appears to be altering Section 6 rather than Section 4.
REPRESENTATIVE SEATON observed that the page numbers referred to
in Amendment 1 merely need to be changed from pages 4 [and 5] to
pages 3 [and 4].
The committee took an at-ease from 2:36 p.m. to 2:37 p.m.
2:37:35 PM
CO-CHAIR SAMUELS made a motion to amend Amendment 1 such that it
would refer to pages 3 and 4. There being no objection,
Amendment 1 was amended.
MR. JARDELL explained that the first portion of Amendment 1, as
amended, would clarify that "the state contract can utilize
alternative dispute resolutions through arbitration," and that
the last portion of Amendment 1, as amended, would ensure that
the authority to enter and enforce an arbitration award in a
state other than Alaska is effective only after the arbitration
award is entered and enforcement is sought in the Alaska
Superior Court. Currently under the contract, he added, any
arbitration award would have to be filed with an Alaskan court
first, and if the enforcement didn't happen within the specified
time, then the [recipient] could seek enforcement of the
arbitrator's award in another state.
REPRESENTATIVE SEATON questioned whether it is the intention to
provide a waiver of the state's immunity from arbitration as
well as from suit.
MR. JARDELL said it is; with the adoption of Amendment 1, as
amended, the ASGF Contract could then contain a provision that
would waive the state's immunity from arbitration. Such a
waiver would be required in order for the state to use the
arbitration process. In response to questions, he indicated
that including terms relating to arbitration and alternate
dispute resolution in the ASGF Contract would be optional rather
than mandatory; that if such terms are included, those terms
could specify whether arbitration must be undertaken in all
cases or just in some cases; that currently the ASGF Contract
specifies that arbitration is the preferred method of settling
disputes; and that an arbitration decision will be the final
decision - in other words, it will be binding arbitration.
REPRESENTATIVE LeDOUX turned attention to page 4, line 2, and
asked whether the term, "the state" should instead read, "this
state".
MR. JARDELL offered his understanding that the drafters use the
term, "the state" to mean the state of Alaska, and so he doesn't
think it matters if that term is changed.
REPRESENTATIVE LeDOUX and REPRESENTATIVE GATTO indicated,
however, that with the adoption of Amendment 1, as amended, the
term, "the state" as used on page 4, line 2, would no longer be
clear that what is meant is the state of Alaska.
2:46:24 PM
REPRESENTATIVE LeDOUX made a motion to amend Amendment 1, as
amended, to add the words, "of Alaska" after the word, "state"
on page 4, line 2, of HB 2004. There being no objection,
Amendment 1, as amended, was further amended in this fashion.
CO-CHAIR SAMUELS removed his objection, and asked whether there
were any further objections to Amendment 1, as amended [twice].
There being none, Amendment 1, as amended, was adopted.
2:46:54 PM
CO-CHAIR SAMUELS referred to Amendment 2, labeled 24-GH2046\A.2,
Bailey, 6/2/06, which read:
Page 6, following line 18:
Insert a new bill section to read:
"* Sec. 11. AS 43.82.435 is amended by adding a new
subsection to read:
(b) 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."
Renumber the following bill sections accordingly.
Page 10, line 23:
Delete "Sections 1 - 12, 15, 16, and 18"
Insert "Sections 1 - 13, 16, 17, and 19"
Page 10, line 25:
Delete "Section 17"
Insert "Section 18"
CO-CHAIR SAMUELS explained that Amendment 2 would clarify that
contract terms that pertain to taxes [or payments in lieu of
such taxes] may not be amended without further legislative
action.
CO-CHAIR RAMRAS made a motion to adopt Amendment 2.
CO-CHAIR SAMUELS objected [for the purpose of discussion].
CO-CHAIR RAMRAS indicated approval of Amendment 2.
REPRESENTATIVE SEATON pointed out that Amendment 2 specifically
stipulates that the contract can contain provisions that allow
[the administration] to alter terms unrelated to taxes [or
payments in lieu of such taxes] without legislative approval.
CO-CHAIR SAMUELS concurred.
REPRESENTATIVE SEATON asked whether, under Amendment 2, the
contract could then contain a provision allowing the
administration to change terms related to tax credits.
CO-CHAIR SAMUELS acknowledged that that point should be
clarified.
CO-CHAIR SAMUELS [made a motion to amend] Amendment 2 such that
the words, "taxes described in" are altered to read, "taxes or
credits described in". There being no objection, Amendment 2
was amended.
REPRESENTATIVE SEATON suggested that Amendment 2, as amended, be
considered conceptual so as to allow the drafter to include the
correct statutory references pertaining to credits.
CO-CHAIR SAMUELS concurred. [Amendment 2, as amended, was
treated as a conceptual amendment.]
CO-CHAIR SAMUELS removed his objection to Conceptual
Amendment 2, as amended, and asked whether there were any
further objections. There being none, Conceptual Amendment 2,
as amended, was adopted.
CO-CHAIR SAMUELS referred to Amendment 3, which read [original
punctuation provided but some formatting changed]:
AS 43.82 is amended by adding a new section to read:
Sec. 43.82.255. Term of contract provisions
related to oil. (a) The provisions of this section may
apply to a contract developed under AS 43.82.020 that
provides for periodic payment in lieu of taxes on oil
under AS 43.55.
(b) For the part of the contract term beginning
immediately after the date of full project funding or
the date of issuance of a certificate of public
convenience and necessity for construction and initial
operation of the Alaska Natural Gas Pipeline,
whichever date is later, and ending 14 years after
that date, the commissioner may develop a term for the
contract that provides for payments in lieu of the
taxes on oil set out in AS 43.55. For the part of the
contract term covered by this subsection, the payments
in lieu of taxes may be established with as much
certainty as the Constitution of the State of Alaska
allows.
(c) For the part of the contract term beginning
immediately after the period described in (b) of this
section, and ending on a date not later than 25 years
after the effective date of the contract, the amount
of the payment in lieu of tax on oil under AS 43.55
must be equal to the amount of the tax levied by law.
However, the commissioner may develop a contract term
that, in the event of a material change in the taxes
enacted after the effective date of the contract,
establishes a procedure for restoring the parties to
substantially the same economic position they had as
of the end of the period described in (b) of this
section immediately before the change.
(d) Implementation of a contract provision
authorized in this section may be made subject to the
dispute resolution procedures of the contract.
2:51:57 PM
CO-CHAIR RAMRAS made a motion to adopt Amendment 3.
CO-CHAIR SAMUELS objected for the purpose of discussion. Noting
that the ASGF Contract locks in oil [tax rates] for 30 years, he
explained that Amendment 3 takes into account a three-part
scenario. The first part - which is not addressed by
Amendment 3 - is that there will be no fiscal certainty on oil
until after the date of full project funding or the date of
issuance of a certificate of public convenience and necessity -
which is when the Federal Energy Regulatory Commission (FERC)
has sanction - and full project funding usually occurs after the
FERC sanction; in other words, there shall be no fiscal
certainty until after the project is sanctioned. The second
part - which is addressed via proposed AS 43.82.255(b) of
Amendment 3 - is that after project sanction or full project
funding, there shall be full capital cost recovery, for a period
of 14 years, before the tax rules can be changed. The third
part - which is addressed via proposed AS 43.82.255(c) of
Amendment 3 - is that there shall be a "fiscal balancing
agreement" after the period referred to in proposed AS
43.82.255(b), [though for no later than 25 years after the
effective date of the contract]; this provision requires that
any changes to the tax rules will result in the total economic
impact to the industry remaining the same, just as if no changes
had been made.
CO-CHAIR SAMUELS indicated that delays in the project won't
impact this three part scenario or its timelines, and remarked,
"It's a three-phase certainty on oil [in] which they get nothing
in the front end, they get it locked in in the middle, and at
the end we all come back to the table."
2:56:05 PM
REPRESENTATIVE OLSEN asked whether fiscal balancing mechanisms
are currently in use in other jurisdictions.
CO-CHAIR SAMUELS relayed that they are.
REPRESENTATIVE CRAWFORD noted that one of the [legislature's]
consultants has said that they have identified approximately $16
billion worth of direct subsidies in the ASGF Contract and
expect to find more.
CO-CHAIR SAMUELS indicated that Amendment 3 pertains to just oil
taxes and has nothing to do with gas.
REPRESENTATIVE CRAWFORD pointed out that the aforementioned
subsidies to the oil companies pertain to the gas pipeline
project and that the fiscal certainty with regard to oil taxes
that Amendment 3 provides for is also tied to the gas pipeline
project.
CO-CHAIR SAMUELS said he did not look too much at the gas terms
in the ASGF Contract; rather, he and others are simply not
willing to lock in oil taxes for 30 years, and Amendment 3 will
alleviate some of that concern.
REPRESENTATIVE LeDOUX asked which other jurisdictions use fiscal
balancing mechanisms and what the reasoning was behind using a
14-year timeframe in proposed AS 43.82.255(b).
CO-CHAIR SAMUELS relayed that he didn't have the information
regarding the other jurisdictions with him at this time but
would provide it later, and that the economists he'd spoken with
gave him a range of 12 to 15 years and so he'd simply chosen to
use 14 years.
REPRESENTATIVE SEATON questioned how Amendment 3 will work with
Amendment 2, as amended, given that Amendment 3 allows for
contract terms related to Payment in Lieu of Taxes (PILT) to be
developed after the contract is in place, while Amendment 2, as
amended, prohibits such contract term changes to be made without
further legislative approval. He also questioned how
Amendment 3 fulfills Co-Chair Samuels's intention to not provide
fiscal certainty until project sanction.
CO-CHAIR SAMUELS offered his understanding that proposed AS
43.82.255(b) says that [the producers] cannot have fiscal
certainty until full project funding occurs.
3:02:19 PM
REPRESENTATIVE SEATON asked whether the wording [in Amendment 3]
is clear enough to allow the legislature to change the tax
structure between now and project sanction.
CO-CHAIR SAMUELS said that is certainly the intent.
CO-CHAIR RAMRAS expressed disfavor with the 14-year timeframe
outlined in proposed AS 43.82.255(b), with the 25-year timeframe
outlined in proposed AS 43.82.255(c), and with the concept of
fiscal balancing as outlined in proposed AS 43.82.255(c).
CO-CHAIR SAMUELS, in response to a question, relayed that the
definition of, "full project funding" is located in statute
under the Alaska Stranded Gas Development Act: "full project
funding" means full approval by a party to a contract under AS
43.82.020 for the expenditure of the capital necessary for
construction and operation of the approved qualified project
that is subject to the contract".
CO-CHAIR RAMRAS expressed favor with proposed AS 43.82.255(a),
questioned the math being used to justify the use of the 14-year
timeframe in proposed AS 43.82.255(b), and remarked on
conversations he'd had with the Senate president regarding the
various timeframes for different aspects of the project -
specifically that he was under the impression that full capital
cost recovery could occur within double the number of years it
takes to construct the project.
CO-CHAIR SAMUELS offered his understanding that it would be
roughly five years before project sanction occurs, followed by
five years of construction, and then another seven years after
that for full capital cost recovery to occur.
CO-CHAIR RAMRAS said he interprets the language in proposed AS
43.82.255(b) that says, "whichever date is later, and ending 14
years after that date," to mean that there will be a project
sanction period - which goes for five years - and then the "14-
year clock starts running after" the four or five years it takes
to obtain project sanction.
CO-CHAIR SAMUELS, concurred, and in response to comments and
questions wherein an example of a starting date was given, said
that the 25-year period begins on the effective date of the ASGF
Contract. Thus, every year of delay of the project from the
contract's effective date is a year less that the producers have
to take advantage of the fiscal balancing mechanism referred to
in proposed AS 43.82.255(c). In response to comments and a
question, he indicated that all of proposed AS 43.82.255(c)
pertains to fiscal balancing.
3:12:36 PM
CO-CHAIR SAMUELS, in response to queries, reiterated his
explanation of Amendment 3 and the aforementioned three-part
scenario, and offered his understanding that the fiscal
balancing agreement provided for by proposed AS 43.82.255(c)
will allow changes to be made to the terms related to oil while
also requiring that the economic positions of the parties remain
"flat." He pointed out, though, that proposed AS 43.82.255(c)
may never come into play, depending on how soon project sanction
is obtained [and how soon after that that the project actually
gets built].
REPRESENTATIVE LeDOUX asked why they would bother to change the
contract if under proposed AS 43.82.255(c) the economic
positions of all parties remains the same.
CO-CHAIR SAMUELS suggested that proposed AS 43.82.255(c) serves
as a compromise, and offered that there may be many reasons to
renegotiate the terms of the contract that "don't affect the
money."
REPRESENTATIVE LeDOUX questioned, though, why they shouldn't
always be able to renegotiate such terms.
CO-CHAIR SAMUELS characterized that as a legitimate argument
[against locking in the terms of the agreement].
REPRESENTATIVE CRAWFORD asked what the practical effect will be
of leaving the terms pertaining to oil open for renegotiation
during the period prior to project sanction. He also raised the
question of what might happen if MidAmerican Energy Holdings
Company or TransCanada PipeLines Limited decides to build a
pipeline.
CO-CHAIR SAMUELS, to the latter question, remarked that the
whole thing would be a moot point and everything would have to
be renegotiated. In response to another question, he ventured
that the provisions of Amendment 3 would only apply if the ASGF
Contract passes, because the provisions of the ASGF contract
that propose to lock in the terms pertaining to oil are unique
to that contract. He offered that under Amendment 3, the
concerns that the industry doesn't really want to build the
pipeline to begin with should be alleviated by the fact that if
they don't build the gas pipeline - if the producers don't get
to project sanction - then the legislature can change the [oil]
taxes whenever it wants and as often as it wants regardless of
whether a contract has been signed.
3:19:16 PM
REPRESENTATIVE SEATON questioned whether the proposed fiscal
balancing agreement provided for in proposed AS 43.82.255(c) of
Amendment 3 would also be applied in cases involving changes to
municipal taxes.
CO-CHAIR SAMUELS indicated that it would. In response to
comments, he reiterated his belief that the provisions of
Amendment 3 would only apply to the ASGF Contract and only if
that specific contract is approved and executed.
CO-CHAIR RAMRAS argued that Amendment 3 does not specifically
refer to the ASGF Contract.
CO-CHAIR SAMUELS pointed out, however, that Amendment 3 does
specify that the contract to which it applies must have been
developed under AS 43.82.020, the Alaska Stranded Gas
Development Act, which is [purportedly] what the ASGF Contract
was developed under.
REPRESENTATIVE SEATON questioned whether Amendment 3 really only
applies to PILT on oil.
CO-CHAIR SAMUELS offered his understanding that Amendment 3 will
apply to a contract developed under AS 43.82.020 that also
happens to provide for PILT on oil, adding that he is assuming
that there will be PILT in situations where oil taxes are locked
in.
MR. DONOHUE indicated that it is the intent of the parties to
have the production profits tax (PPT) incorporated into a
contract so as to ensure that it plays a roll in providing
fiscal certainty to the producers.
CO-CHAIR SAMUELS, in response to comments, suggested that
Amendment 3 should be clarified with regard to whether it only
applies to PILT on oil.
3:24:55 PM
CO-CHAIR SAMUELS, in response to other questions, indicated that
the intention [with Amendment 3 - and] in relation to Amendment
2, as amended - would be that whatever terms were in place at
time of project sanction with regard to oil would be locked in;
therefore, at the time of project sanction, the legislature will
have to decide what the rates on oil should be set at.
REPRESENTATIVE LeDOUX surmised, then, that that rate would not
necessarily be "today's rate" because the rates on oil can
change up until the time of project sanction.
CO-CHAIR SAMUELS concurred, and said that that is the intent.
REPRESENTATIVE GATTO referred to the definition of, "full
project funding" in the Alaska Stranded Gas Development Act, and
surmised that the producers wouldn't necessarily have to accept
a tax rate that they felt was unreasonable.
CO-CHAIR SAMUELS concurred, suggesting that in such a situation,
the producers could simply decide not to pursue project
sanction. In response to a comment, he reiterated that there is
no fiscal certainty being provided until project sanction is
obtained.
CO-CHAIR RAMRAS mentioned merger and acquisition activity, and
suggested that the return that the producers and the State of
Alaska, through the Alaska Natural Gas Pipeline Corporation
("ANGPC"), will enjoy will be massive. He opined that although
some degree of fiscal certainty should be provided for, a period
of 14 years is too long, and that there is no need for fiscal
balancing after the expiration of that period.
3:30:27 PM
CO-CHAIR RAMRAS made a motion to amend Amendment 3: to replace
"14" with "10" in proposed AS 43.82.255(b), and to delete
proposed AS 43.82.255(c).
CO-CHAIR SAMUELS recommended dividing the question, and asked
whether a change to 12 years would be amenable. [Although the
motion was not restated, Co-Chair Samuels treated the question
as divided and announced that Amendment 3 was amended by
replacing "14" with "12" in proposed AS 43.82.255(b).]
CO-CHAIR RAMRAS [made a motion to] delete proposed AS
43.82.255(c) from Amendment 3, as amended.
CO-CHAIR SAMUELS objected.
CO-CHAIR RAMRAS said he objects to the notion of having to
lessen taxes in one area because the taxes in another area have
been raised.
REPRESENTATIVE CRAWFORD asked what will happen after the 12-year
timeframe has passed if proposed AS 43.82.255(c) is deleted.
CO-CHAIR SAMUELS opined that deleting proposed AS 43.82.255(c)
will result in there not being any fiscal certainty on oil.
CO-CHAIR RAMRAS expressed favor with that concept.
CO-CHAIR SAMUELS said that he would be maintaining his objection
to deleting proposed AS 43.82.255(c) from Amendment 3, as
amended. He offered his belief that companies which "take firm
transportation commitments" will be "on the hook to pay" even
after capital cost recovery has been achieved and regardless of
the price of gas, and suggested that some sort of stability
should be provided for the life of the contract.
CO-CHAIR RAMRAS argued that those companies will also be reaping
extraordinary benefits, and opined that fiscal balancing is
simply a way of capping the state's share of revenue - something
that he objects to as being bad policy.
3:36:34 PM
REPRESENTATIVE SEATON pointed out that Amendment 3, as amended,
proposes to affect oil rates, whereas the aforementioned firm
transportation commitments pertain to gas.
A roll call vote was taken. Representatives Elkins, Gatto,
LeDoux, Olson, Seaton, Crawford, and Kapsner voted in favor of
the second amendment to Amendment 3, as amended.
Representatives Ramras and Samuels voted against it. Therefore,
the second amendment to Amendment 3, as amended, was adopted by
a vote of 7-2.
REPRESENTATIVE SEATON made a motion to conceptually amend
Amendment 3, as amended [twice], such that proposed AS
43.82.255(a) be altered by adding the word, "may" between the
words, "section" and "apply", and by adding words on the end to
specify the committee's intent, for example, something along the
lines of, "certainty for fiscal terms for oil do not apply until
project sanction and will be the terms in place at the time".
There being no objection, Amendment 3, as amended [twice], was
again amended.
CO-CHAIR SAMUELS removed his objection, and asked whether there
were any further objections to Amendment 3, as amended. There
being none, Amendment 3, as amended, was adopted.
3:39:19 PM
[Following was a brief discussion regarding which amendment
would be taken up as Amendment 4.]
REPRESENTATIVE GATTO made a motion to adopt Amendment 4, labeled
24-GH2046\A.3, Bailey, 6/3/06, which, along with additional
text, read:
Page 3, line 25:
Delete "long-term fiscal [BEST]"
Insert "best"
Page 4, following line 23:
Insert a new bill section to read:
"* Sec. 6. AS 43.82.210(b) is amended to read:
(b) If the commissioner chooses to develop
proposed terms under (a) of this section, the
commissioner shall, if practicable and consistent with
the best [LONG-TERM FISCAL] interests of the state,
develop the terms in a manner that attempts to balance
the following principles:
(1) the terms should, in conjunction with
other factors such as cost reduction of the project,
cost overrun risk reduction of the project, increased
fiscal certainty, and successful marketing, improve
the competitiveness of the approved qualified project
in relation to other development efforts aimed at
supplying the same market;
(2) the terms should accommodate the
interests of the state, affected municipalities, and
the project sponsors under a wide range of economic
conditions, potential project structures, and
marketing arrangements;
(3) the state's and affected
municipalities' combined share of the economic rent of
the approved qualified project under the contract
should be relatively progressive; that is, the state's
and affected municipalities' combined annual share of
the economic rent of the approved qualified project
generally should not increase when there are decreases
in project profitability, or decrease when there are
increases in project profitability;
(4) the state's and affected
municipalities' combined share of the economic rent of
the approved qualified project under the contract
should be relatively lower in the earlier years than
in the later years of the approved qualified project;
(5) the terms should allow the project
sponsors to retain a share of the economic rent of the
approved qualified project that is sufficient to
compensate the sponsors for risks under a range of
economic circumstances;
(6) the terms should provide the state and
affected municipalities with a significant share of
the economic rent of the approved qualified project,
when discounted to present value, under favorable
price and cost conditions;
(7) the method for calculating the periodic
payment in lieu of certain taxes under the contract
should be clear and unambiguous; and
(8) while cost calculations for the
approved qualified project under the contract should
be based on amounts that closely approximate actual
costs, agreed-upon formulas reflecting reasonable
economic assumptions should be used if possible to
promote administrative certainty and efficiency."
Renumber the following bill sections accordingly.
Page 6, following line 8:
Insert a new bill section to read:
"* Sec. 11. AS 43.82.260(d) is amended to read:
(d) The commissioner may not unreasonably
withhold approval under (a) of this section, but may
condition the approval in any way reasonably necessary
to protect the best [FISCAL] interests of the state
and to further the purposes of this chapter."
Renumber the following bill sections accordingly.
Page 6, following line 18:
Insert new bill sections to read:
"* Sec. 13. AS 43.82.310(b) is amended to read:
(b) If requested by the applicant, information
provided to the commissioner of revenue or the
commissioner of natural resources under AS 43.82.300
shall be kept confidential if the commissioner
receiving the information determines, upon an adequate
showing by the applicant, that the information
(1) is a trade secret or other proprietary
research, development, or commercial information that
the applicant treats as confidential;
(2) affects the applicant's competitive
position; and
(3) has commercial value that may be
significantly diminished by public disclosure or that
public disclosure is not in the best [LONG-TERM
FISCAL] interests of the state.
* Sec. 14. AS 43.82.310(c) is amended to read:
(c) Information determined to be confidential
under (b) of this section is confidential under that
subsection only so long as is necessary to protect the
competitive position of the applicant, to prevent the
significant diminution of the commercial value of the
information, or to protect the best [LONG-TERM FISCAL]
interests of the state. The commissioner of revenue or
the commissioner of natural resources, as appropriate,
may not release information that the commissioner has
previously determined to be confidential under (b) of
this section without providing the applicant notice
and an opportunity to be heard.
* Sec. 15. AS 43.82.400(a) is amended to read:
(a) If the commissioner develops a proposed
contract under AS 43.82.200 - 43.82.270, the
commissioner shall
(1) make preliminary findings and a
determination that the proposed contract terms are in
the best [LONG-TERM FISCAL] interests of the state and
further the purposes of this chapter; and
(2) prepare a proposed contract that
includes those terms and shall submit the contract to
the governor.
* Sec. 16. AS 43.82.430(b) is amended to read:
(b) After considering the material described in
(a) of this section and securing the agreement of the
other parties to the proposed contract regarding any
proposed amendments prepared under (a) of this
section, if the commissioner determines that the
contract is in the best [LONG-TERM FISCAL] interests
of the state, the commissioner shall submit the
contract to the governor."
Renumber the following bill sections accordingly.
Page 10, line 23:
Delete "Sections 1 - 12, 15, 16, and 18"
Insert "Sections 1 - 18, 21, 22, and 24"
Page 10, line 25:
Delete "Section 17"
Insert "Section 23"
CO-CHAIR SAMUELS objected for the purpose of discussion.
REPRESENTATIVE GATTO, indicating that Amendment 4 pertains to
the issue of "best interest findings," and using an example
regarding coal bed methane (CBM) drilling and the Matanuska-
Susitna (Mat-Su) valley, offered his belief that the term,
"long-term fiscal interests" could be interpreted to preclude
the consideration of any other factors such as whether an action
is really in the best interests of the people of the state. He
suggested that the long-term fiscal interests can be included as
part of a best interest finding.
3:42:56 PM
REPRESENTATIVE SEATON pointed out that Amendment 4 conforms the
standard used in HB 2004 to that used in the Alaska Stranded Gas
Development Act.
MR. JARDELL said the administration opposes Amendment 4.
Changing the standards retroactively - with regard to the
process that the parties have been engaged in - would create
enormous problems moving forward. "Although it is a consistency
problem, I would much prefer to leave the current statute alone
and continue with the best interest finding at the end, and
utilize two different standards, than to retroactively change
the standards that we have used to date," he remarked, adding
that the ASGF Contract [shouldn't] be compared with the
aforementioned example involving CBM. He went on to say:
Here, the best interest finding becomes a proposal to
the legislature. It's not binding, it's not
determinative. If we make the best interest finding
as it's currently written, we submit the contract to
the legislature, and the legislature will have the
decision, ultimately, to make the decision of best
interest. The best interest finding here really is
just a step before you propose the contract to the
legislature for the legislature to make the decision
of whether it's in the best interest of the state. So
the protections afforded to the people of your
district are that you have a chance to look at it,
make that determination, before implementation. And
so I really don't think that [the issues that] were
raised in the [CBM situation] really have an
application to how this will go ... forward and how it
will be implemented.
MR. JARDELL, in response to a question, relayed that the "long-
term fiscal interest" standard was used from the start in the
negotiation process.
MR. DONOHUE explained that the preliminary fiscal interest
findings have already been issued and the basis for those
findings is an ultimate decision, a determination, that on a
preliminary basis this contract satisfies the "long-term fiscal
interests of the state" criterion. The final findings that will
be made after the public review process, after the legislative
comment period, and after the renegotiation period, is subject
to the same long-term fiscal interest finding requirement and an
additional requirement, which is that the commissioner find that
the contract is in conformity with the law, "which is one of the
reasons we're here today," he added, "to move the conforming
amendments bill to allow the commissioner to make those
findings." There is only one place in the Alaska Stranded Gas
Development Act where the term, "best interests" is used,
whereas the term, "long-term fiscal interests" is used much more
pervasively, and the goal with the bill's proposed language
change is to make the terminology consistent throughout the
Alaska Stranded Gas Development Act.
3:48:02 PM
REPRESENTATIVE LeDOUX asked why, if the ASGF Contract really is
in the best interests of the state, couldn't the commissioner
simply review the testimony, come to the conclusion that the
contract is in the best interests of the state, and amend the
findings to say that such is the case if indeed it really is.
MR. JARDELL said that if the term, "best interests" is left in
statute, it would require that a best interest finding be made
prior to the ASGF Contract being forwarded to the legislature.
He added:
If you want a best interest finding, if that is the
desire of the legislature or this committee, then I
would suggest that ... instead of changing -
retroactively - all of the standards, that you just
leave the best interest finding, and that would
require a best interest finding before the contract
gets submitted to the legislature.
REPRESENTATIVE LeDOUX surmised, then, that the administration
can live with the first portion of Amendment 4 - that which
proposes to change the language on page 3, line 25, of HB 2004 -
but not with the remainder of Amendment 4.
MR. JARDELL indicated agreement.
REPRESENTATIVE CRAWFORD opined that there is either a
consistency problem or there is not, and surmised that [the
administration simply] didn't want "the rest of the contract" to
be consistent with "best interests." There are a lot of
interests that do not necessarily fall under the term, "fiscal
interests", he remarked, adding that he believes the State
should be negotiating for the best interests of the state, not
just for the long-term fiscal interests; the concept of looking
out for the best interests of the state is central to what they
as legislators should be doing.
MR. JARDELL said that the administration thinks it would be
better if the information it disseminates to the public is based
on the same standard as "the final standard," and offered his
belief that the administration always works for best interests
of the state.
REPRESENTATIVE CRAWFORD offered his understanding that the
courts have already defined the term, "best interests" but have
not yet done so for the term, "long-term fiscal interests",
adding his belief that using the term, "best interests" will
provide protection to the state, protection that is backed up by
the courts.
CO-CHAIR SAMUELS asked whether Amendment 4 was intended to act
retroactively; in other words, was it meant to change the
standard for work that has already been done.
3:54:06 PM
REPRESENTATIVE GATTO offered his belief that "long-term fiscal
interests" is already included in "best interests". He
remarked:
My thoughts about Mr. Jardell's statement that at the
end of the process you will be able to rule
individually on whether or not this contract satisfies
the best interests of the state, that would mean, at
that point, when it was done, we would have to now go
back and review the entire contract all over again and
try to determine for ourselves whether or not any
specific part was in the best interests of the state.
I can look at, and accept, as [Representative
Crawford] ... has said, that we can rely on some other
people to use court-determined defined actions and
rulings of what the best interest is. We do not have
a single ruling on what a long-term fiscal interest
is, so we are leaving ourselves wide open to
nullifying what the best interests of the state are.
REPRESENTATIVE GATTO suggested that by adopting Amendment 4, it
wouldn't necessarily follow that the parties would have go back
and change anything, because the ASGF Contract already addresses
the issue of long-term fiscal interests, and so using the term,
"best interests" merely adds another measure by which to
consider the terms of the contract.
CO-CHAIR SAMUELS expressed concern with changing the standard
retroactively.
MR. JARDELL pointed out that currently, the Alaska Stranded Gas
Development Act - in AS 43.82.210(b) - speaks to developing
terms that in addition to being in the long-term fiscal
interests of the state, should balance certain principles, those
principles being:
(1) the terms should, in conjunction with other
factors such as cost reduction of the project, cost
overrun risk reduction of the project, increased
fiscal certainty, and successful marketing, improve
the competitiveness of the approved qualified project
in relation to other development efforts aimed at
supplying the same market;
(2) the terms should accommodate the interests of
the state, affected municipalities, and the project
sponsors under a wide range of economic conditions,
potential project structures, and marketing
arrangements;
(3) the state's and affected municipalities'
combined share of the economic rent of the approved
qualified project under the contract should be
relatively progressive; that is, the state's and
affected municipalities' combined annual share of the
economic rent of the approved qualified project
generally should not increase when there are decreases
in project profitability, or decrease when there are
increases in project profitability;
(4) the state's and affected municipalities'
combined share of the economic rent of the approved
qualified project under the contract should be
relatively lower in the earlier years than in the
later years of the approved qualified project;
(5) the terms should allow the project sponsors
to retain a share of the economic rent of the approved
qualified project that is sufficient to compensate the
sponsors for risks under a range of economic
circumstances;
(6) the terms should provide the state and
affected municipalities with a significant share of
the economic rent of the approved qualified project,
when discounted to present value, under favorable
price and cost conditions;
(7) the method for calculating the periodic
payment in lieu of certain taxes under the contract
should be clear and unambiguous; and
(8) while cost calculations for the approved
qualified project under the contract should be based
on amounts that closely approximate actual costs,
agreed-upon formulas reflecting reasonable economic
assumptions should be used if possible to promote
administrative certainty and efficiency.
MR. JARDELL also pointed out that the ASGF Contract is a
"fiscal" contract. He assured the committee that if the
administration cannot make a best interest finding, it will not
go forward with the ASGF Contract.
REPRESENTATIVE LeDOUX made a motion to amend Amendment 4, to
delete everything but the change proposed to page 3, line 25, of
HB 2004.
REPRESENTATIVE GATTO objected. He referred to a June 1, 2006,
memorandum written by Dennis Bailey, Legislative Legal and
Research Services, and relayed that Mr. Bailey has said that the
Alaska Supreme Court has addressed interpretation of the "best
interest" findings and summarized it but has not done so for the
term, "long-term fiscal interests" Representative Gatto opined
that using an undefined term will complicate matters more than
will using established terminology already defined by the Alaska
Supreme Court. He reiterated his belief that using the term,
"best interests" won't occasion drastic changes, because a best
interest finding will find that the long-term fiscal interests
are already met.
3:59:26 PM
CO-CHAIR SAMUELS expressed favor with the amendment to
Amendment 4.
REPRESENTATIVE SEATON expressed disfavor with changing the
standard retroactively, but opined that the commissioner's final
determination should be a best interest finding. He asked
whether the amendment to Amendment 4 will result in the later.
CO-CHAIR SAMUELS and REPRESENTATIVE LeDOUX offered their belief
that it would.
REPRESENTATIVE LeDOUX opined that the Alaska Stranded Gas
Development Act should have used the term, "best interests"
throughout to begin with. However, as long as a best interest
finding is made before the contract goes forward, she remarked,
then she will be satisfied.
REPRESENTATIVE SEATON asked whether a legal challenge to the
commissioner's finding would be to the final finding, that being
a best interest finding.
JARDELL said it would.
A roll call vote was taken. Representatives Elkins, LeDoux,
Olson, Seaton, and Samuels voted in favor of the amendment to
Amendment 4. Representatives Gatto, Crawford, and Ramras voted
against it. Therefore, the amendment to Amendment 4 was adopted
by a vote of 5-3.
CO-CHAIR SAMUELS asked whether there were any objections to
Amendment 4, as amended. There being none, Amendment 4, as
amended, was adopted.
4:03:16 PM
REPRESENTATIVE SEATON made a motion to adopt Amendment 5,
labeled 24-GH2046\A.4, Bailey, 6/3/06, which read:
Page 3, line 27, through page 4, line 2:
Delete all material and insert:
"(b) A contract developed under this chapter may
not include a waiver of the state's sovereign or other
immunity."
Page 10, line 14:
Delete "and (b)"
CO-CHAIR SAMUELS objected for the purpose of discussion.
REPRESENTATIVE SEATON made a motion to amend Amendment 5, to
delete the words, "or other" from the language that would be
inserted. There being no objection, Amendment 5 was amended.
REPRESENTATIVE SEATON offered his belief that the legislature
did not intend, in the Alaska Stranded Gas Development Act, to
waive the state's sovereign immunity, and opined that doing so
would put the state in a very bad position.
REPRESENTATIVE LeDOUX noted, though, that if Amendment 5, as
amended, is adopted, there will be no way for the state to
settle disputes, adding her belief that the State waives its
sovereign immunity in just about any commercial transaction it
engages in.
REPRESENTATIVE SEATON pointed out that nothing in Amendment 5,
as amended, says that the State cannot waive sovereign immunity;
instead, it says that the contract terms may not include a
waiver of the state's sovereign immunity. He offered his belief
that the State can always waive its immunity.
4:05:51 PM
REPRESENTATIVE LeDOUX argued that generally speaking, when
people enter into a contract with the State, they want to know
in advance whether they will be able to bring suit against the
state; they don't want the State to just be able to decide on a
case-by-case basis whether it will waive its sovereign immunity
in one particular situation but not in another. If the latter
were the case, the State could simply decide not to waive
sovereign immunity in cases it thinks it might lose. Although
not a proponent of the ASGF Contract's "fiscal certainty"
provisions, she remarked, she does believe that parties to an
agreement should be given certainty with regard to being able to
seek remedy through the court system.
REPRESENTATIVE SEATON expressed disbelief that the State waives
its sovereign immunity in every contract, for example, that the
Department of Transportation & Public Facilities (DOT&PF) enters
into.
REPRESENTATIVE LeDOUX posited that such a waiver is probably
included as boilerplate language in DOT&PF contracts.
CO-CHAIR SAMUELS questioned whether, if a provision requiring
the State to waive its sovereign immunity is not included in the
ASGF Contract, could the State then simply make a determination
on a case-by-case basis - every time a dispute arises -
regarding whether it will waive sovereign immunity.
REPRESENTATIVE SEATON offered his belief that typically the
State allows itself to be sued.
MR. JARDELL said he can't provide information on DOT&PF
contracts at this time, but offered his understanding that the
State does waive sovereign immunity in every contract;
furthermore, the State is routinely sued "under contract, in
quasi-contract, and torts - otherwise, no one would enter into a
contract with us." He indicated that Amendment 5, as amended,
causes some concern on a policy level because sovereign immunity
needs to be waived in order for the State to be sued or to enter
into arbitration. He offered his belief that lack of an express
waiver of sovereign immunity will prevent the project from going
forward; furthermore, the State wants to be able to utilize the
tool of arbitration - and such would not be possible without an
express waiver - because the potential benefits of doing so far
outweigh any potential problems, particularly given that
arbitration, which is utilized in commercial transactions all
over the world, is a quick and efficient method of resolving
disputes.
MR. JARDELL also pointed out that the language currently in the
bill - along with Amendment 1, as amended - merely provides the
authority for the negotiators to consider inserting waiver
language in the ASGF Contract, and that the administration did
not feel that providing such authority was [an unreasonable]
concession given the focus on negotiating for terms that would
result in higher revenue streams for the state. In response to
a question, he offered his understanding that sovereign immunity
is usually waived via statutory language.
MR. DONOHUE explained that there is a constitutional provision
which says that the legislature shall establish procedure for
suits against the state; thus the notion of sovereign immunity
is totally a legislative policy decision. Certain causes of
action are allowed to be brought against the state on a regular
basis, and certain causes of action are precluded.
MR. JARDELL posited that the language [of Amendment 5, as
amended] could be read to say that the state may not waive its
sovereign immunity in the ASGF Contract, and thus the state
would be forced to assert sovereign immunity.
4:16:49 PM
A roll call vote was taken. Representatives Gatto, Seaton,
Crawford, and Kapsner voted in favor of Amendment 5, as amended.
Representatives Elkins, LeDoux, Olson, Ramras, and Samuels voted
against it. Therefore, Amendment 5, as amended, failed by a
vote of 4-5.
[Following was a brief discussion regarding which amendment
would be taken up as Amendment 6.]
The committee took an at-ease from 4:18 p.m. to 4:23 p.m.
REPRESENTATIVE SEATON made a motion to adopt Amendment 6,
labeled 24-GH2046\A.5, Wayne, 6/3/06, which read:
Page 3, line 26:
Delete "a new subsection"
Insert "new subsections"
Page 4, following line 2:
Insert a new subsection to read:
"(c) If the commissioner approves an application
and proposed project plan under AS 43.82.140 and
develops a contract that does not by its terms require
a party to complete the project named in the contract,
the contract must, at a minimum, contain
(1) a list of each and every specific act a
party to the contract must accomplish before fully
committing to completion of the project named in the
contract, a description of each act, and a timeline
from start to finish that the party shall follow while
accomplishing each act;
(2) a completion date, which may only be
changed with the commissioner's consent, for each act
listed as required by (1) of this subsection;
(3) a commit-in-full date by which a party
must fully commit to completion of the project named
in the contract; and
(4) language allowing the commissioner to
terminate a contract with a party if the party does
not complete an act by its corresponding completion
date or fully commit by the commit-in-full date."
CO-CHAIR SAMUELS objected for the purpose of discussion.
REPRESENTATIVE SEATON explained that Amendment 6 addresses
specific work commitments as outlined on page 5 of the
aforementioned May 29 memorandum by Barnes & Cascio, LLP. He
opined that the state needs a set of work commitments that will
lead to project sanction. However, given that the memorandum
pertains to preliminary documents, Representative Seaton
remarked, he is going to withdraw Amendment 6 at this time, and
allow committee members and the administration time to consider
this issue further so as to be able to address it later.
[Amendment 6 was withdrawn.]
CO-CHAIR SAMUELS relayed that Mr. Barnes is continuing to review
this issue.
4:25:35 PM
REPRESENTATIVE SEATON made a motion to adopt Amendment 7, which
read [original punctuation provided]:
Page 7 subsection (d), Delete all material
Insert: "A collateral agreement negotiated by the
commissioner necessary to implement a contract that
has been authorized by the legislature must be
approved by the legislature."
CO-CHAIR SAMUELS objected.
The committee took two short at-eases between 4:26 p.m. and 4:27
p.m.
CO-CHAIR SAMUELS announced that Amendment 7 has been withdrawn.
REPRESENTATIVE SEATON [made a motion to adopt] Amendment 8,
which read [original punctuation provided]:
Page 4 line 23 after commissioner
Insert "except for a tax imposed by a voter approved
initiative."
CO-CHAIR RAMRAS objected.
REPRESENTATIVE SEATON indicated that Amendment 8 will prevent
the administration from repealing a voter-approved initiative
regarding a reserves tax via language in the ASGF Contract.
4:29:01 PM
CO-CHAIR RAMRAS said he supports [the goal of] Amendment 8 but
would prefer to simply delete proposed AS 43.82.210(a)(8).
REPRESENTATIVE SEATON pointed out that the language currently in
proposed AS 43.82.210(a)(8) is part of the existing Alaska
Stranded Gas Development Act, and surmised that there may be
circumstances in which the issue of other taxes might need to be
addressed in future contracts.
CO-CHAIR RAMRAS removed his objection.
CO-CHAIR SAMUELS objected.
REPRESENTATIVE CRAWFORD said he agrees with [the concept of]
Amendment 8. He added:
I think that the reserves tax is one of the reasons
why we're here and why we're actually debating this;
without the reserves tax impetus I think that we would
have rocked on for a number more years with our gas
languishing in the ground in Prudhoe Bay.
CO-CHAIR SAMUELS opined that a reserves tax will have an impact
on the economics of the project, and that if [the underlying
issue] isn't addressed in the final contract, then the contract
won't be approved by the legislature. He offered his
understanding that indemnification won't nullify the reserves
tax, rather it will merely provide for a rebate, and suggested
that one solution would be for the administration to make it
easier for the state to get out of the contract.
REPRESENTATIVE SEATON, in response to a question, indicated that
Amendment 8 is intended to address the issue of whether the
administration should be allowed to negotiate a contract that
will result in nullifying a voter-approved initiative. He
offered his understanding that even though the legislature has
to wait two years, such an initiative could be changed or
repealed by the legislature long before project sanction is
obtained.
4:36:24 PM
REPRESENTATIVE CRAWFORD suggested that [the reserves tax] will
not add any costs to the project or change the project's
economics; rather, it simply acts as a penalty if producers
don't sell the gas or contract to transport it. As long as the
producers do those things in a timely manner, the tax is
refunded to them.
REPRESENTATIVE GATTO questioned whether the reserves tax
initiative could affect a contract that's already been approved.
MR. JARDELL posited that the administration thinks it is likely
to have a contract prior to the vote on the reserves tax
initiative taking place.
MR. DONOHUE said that assuming the fiscal certainty provisions
of the ASGF Contract are found to be constitutional, they would
in effect indemnify the producers from a reserves tax, whether
such a tax comes about via the initiative process or via
statutory changes.
CO-CHAIR SAMUELS offered his belief, though, that the tax system
proposed by the initiative would be on gas that has not been
produced.
REPRESENTATIVE GATTO asked whether a voter initiative requiring
Alaska hire could affect the ASGF Contract.
MR. DONOHUE suggested that that issue raises other state and
federal constitutional questions.
REPRESENTATIVE GATTO said he is merely questioning whether any
voter initiative could affect the ASGF Contract.
MR. DONOHUE offered his belief that federal contract law and the
ASGF Contract's provisions allowing for fiscal certainty would
prohibit an initiative from having any affect on "contractual
rights under the agreement."
CO-CHAIR RAMRAS said his concern is that the indemnification
would begin with the signing of the contract and not with the
language adopted via Amendment 3, as amended, and therefore he
will be supporting the adoption of Amendment 8.
CO-CHAIR SAMUELS raised the issue of net present value, and
opined that the "front-end money ... takes the economics away."
CO-CHAIR RAMRAS said he rejects the argument that a reserves tax
has anything to do with the construction of a gas pipeline;
rather, they are separate and apart, and he objects to the
formula that "throws it into the net present value computation."
He indicated that he doesn't support the reserves tax
initiative, but supports protecting the rights of the people to
interpret issues differently, adding that he did not become a
legislator in order to thwart the will of the people.
CO-CHAIR SAMUELS characterized [the reserves tax initiative] as
premature.
REPRESENTATIVE CRAWFORD mentioned that if the reserves tax
initiative passes, he intends to introduce legislation that will
"plow all that money into the project so that we don't harm the
net present value" of the tax amount.
A roll call vote was taken. Representatives Gatto, LeDoux,
Seaton, Crawford, Kapsner, and Ramras voted in favor of
Amendment 8. Representatives Elkins, Olson, and Samuels voted
against it. Therefore, Amendment 8 was adopted by a vote of 6-
3.
4:46:33 PM
CO-CHAIR RAMRAS made a motion to adopt Conceptual Amendment 9,
which read [original punctuation provided]:
Page 4, Lines 17-18
Delete all of (5)
Page 4, Lines 22-23
Delete all of (8)
CO-CHAIR SAMUELS objected.
CO-CHAIR RAMRAS noted that Conceptual Amendment 9 will affect
the language just adopted via Amendment 8. He said that much of
the TAPS goes through Fairbanks North Star Borough, which he
said derives a lot of fiscal stability from the taxes assessed
on the TAPS; therefore, because he does not want the
commissioner to be able to affect the assessed value of either
the TAPS or a potential gas pipeline, he is proposing the
deletion of proposed AS 43.82.210(a)(5) and (8).
CO-CHAIR SAMUELS offered that the entire point of the Alaska
Stranded Gas Development Act, however, was to stabilize all the
taxes, including the property taxes; therefore, removing one of
the taxes referred to in proposed AS 43.82.210(a)(1)-(8) could
result in property taxes [increasing dramatically] once the gas
pipeline is built.
REPRESENTATIVE LeDOUX questioned why the proposal is to delete
just paragraphs (5) and (8) and not also paragraphs (4), (6),
and (7), since that same analysis could be applied to those
paragraphs as well.
CO-CHAIR RAMRAS acknowledged that he was simply being sensitive
to the recent assessment challenge on the TAPS, and is concerned
about the subject matter just covered in Amendment 8.
REPRESENTATIVE SEATON noted that proposed AS 43.82.210(a) speaks
to the issue of including terms regarding PILT, allowing the
taxes included therein to be considered for PILT, and he does
not think this provision will diminish the tax amounts;
therefore, he doesn't think it will be beneficial to delete
paragraphs (5) and (8) from proposed AS 43.82.210(a).
A roll call vote was taken. Representatives Elkins, Crawford,
Kapsner, and Ramras voted in favor of Conceptual Amendment 9.
Representatives Gatto, LeDoux, Olson, Seaton, and Samuels voted
against it. Therefore, Conceptual Amendment 9 failed by a vote
of 4-5.
4:52:21 PM
CO-CHAIR RAMRAS made a motion to adopt Conceptual Amendment 10,
which read [original punctuation provided]:
Page 6, line 20-Page 7, line 19
Delete all language
Insert
Sec. 11. AS 43.82 is amended by adding a new
section to read:
Sec. 43.82.437. Collateral Agreements. (a) The
commissioner of revenue with the concurrence of the
commissioner of natural resources may negotiate
collateral agreements that are required to implement
the state's acquisition of an ownership interest in
the project and each project entity to be created to
own and operate any part of the project that is the
subject of a proposed contract developed under this
chapter. Each such collateral agreement shall be a
condition subsequent to the proposed contract
developed under this chapter, shall be subject to
review and authorization to execute by the
legislature, and upon approval may be entered into by
the public corporation as provided in (b) below. The
authority of the commissioner of revenue to negotiate
collateral agreements on behalf of the state lapses
180 days after the effective date of the law
authorizing the contract under AS 43.82.435, provided,
that with respect to collateral agreements submitted
by the commissioner of revenue to the legislature
within the 180 day time limit, the time limit shall be
extended to 5 days after authorization has been
approved. Each project entity collateral agreement to
be negotiated shall incorporate the following minimum
elements:
(1) if organized to do business in the state,
the project entity shall be a limited liability
company organized under the Alaska Revised Limited
Liability Company Act, AS Chapter 10.50 ("Alaska
Act");
(2) for project entities organized under the
Alaska Act, the operating agreement adopted under AS
10.50.095, or equivalent governing document for
project entities organized under other jurisdictions
("Operating Agreement"), shall include the limitation
that the state's obligation to fund continuing capital
and operating obligations shall be subject to annual
appropriation by the legislature; and provide further
that the state's failure to appropriate a capital or
operating obligation shall not be deemed a default of
the state's obligation, but shall be deemed only to
reduce the state's ownership interest on a pro rata
basis based upon the amount of the failed
appropriation relative to the amount of the capital or
operating obligations funded by the remaining project
owners.
(3) the Operating Agreement shall provide that
the state shall not agree to a waiver of sovereign
immunity without a reasonable monetary limit on such
waiver under the facts and circumstances; and provided
further, that the state shall not indemnify, or
otherwise hold harmless any person or entity that has
been adjudged in a judicial, administrative, or
alternative dispute resolution proceeding to be liable
for negligence or misconduct in the performance of the
person's or entity's duty or has been adjudged guilty
of a crime or had such criminal adjudication withheld
subject to probationary terms; provided further, that
the state may not eliminate claims for actual damages
incurred by the state, and may not eliminate the
equitable rights to seek specific performance and
injunctive relief; and provided further that the
rights and limitations provided in this subsection
shall apply to collateral agreements to be entered
into under AS 43.82.437.
(4) the Operating Agreement shall provide that
in the event of a dispute between or among the members
of the entity, a subsidiary entity, an affiliate of a
member, a member representative, and any other person
or legal entity that has a membership or ownership
interest in an owner entity of the project, such
dispute shall be subject to the dispute resolution
terms and procedures set forth in the contract as
approved by the legislature pursuant to AS 43.82.435.
The term "dispute" shall mean a dispute, matter,
controversy or claim arising out of or relating to any
owner entity of the project, to any ownership interest
in the project, to any agreement between or among the
members or owners of any owner entity of the project
arising out of or relating to such owner entity of the
project, or to the operation, management, or
implementation of the project, including its
interpretation, construction, performance,
enforcement, privileges, rights or obligations. Such
dispute resolution terms shall incorporate equivalent
presumptions and burdens of proof as set forth for
civil trials in Rule 301, Presumptions in General in
Civil Actions and Proceedings, and Rule 302,
Applicability of Federal Law in Civil Actions and
Proceedings, Alaska Rules of Evidence as amended.
(5) the Operating Agreement shall provide that
the managing members and member representatives owe a
duty to act in the best interest of the entity and
perform their duties in good faith towards the goal of
implementation of the project.
(6) the Operating Agreement shall provide that
the entity shall not effect a material change or
amendment to the Qualified Project Plan without the
review and authorization of the legislature.
(7) the Operating Agreement shall provide that
the members of the governing body of any subsidiary
entity organized by the entity shall be the members of
the governing board of the entity, unless otherwise
authorized by the legislature,
(8) the Operating Agreement shall provide the
state the unilateral right to initiate expansions of
the project, provided the state funds or obtains third
party funding from a credit worth customer for each
such expansion or extension, and shall include terms
for voluntary expansion, including:
A) holding periodic (every 3-5 years)
binding or non-binding open seasons to assess market
demand for expansion;
B) commit to satisfy all creditworthy
demands for capacity expansion in reasonable
engineering increments;
C) commit expansion for creditworthy
shippers in less-than reasonable engineering
increments when such shippers commit to contributions
in aid of construction sufficient to keep the project
entity whole, including authorized return; and
D) commit the project entity to propose and
defend the use of rolled-in pricing for all
expansions.
(9) the Operating Agreement shall provide that
in the event the entity elects to contract with a
vendor to operate the entity or implement the project,
such vendor shall be independent of and not an
affiliate of the members of the entity.
(10) the Operating Agreement shall provide that
state member shall have the right to participate in
all meetings of the governing board of the entity and
vote on all decisions of the entity, including, but
not limited to, decisions affecting tax allocations
between or among the taxpaying members of the entity.
(11) the Operating Agreement shall provide that
the state member shall have the right to review all
books and records of the entity, including, but not
limited to, all contracts, and to audit the finances
of the entity at any time and from time to time.
(12) the Operating Agreement shall provide that
upon termination, liquidation or dissolution of the
entity, the state shall have a right of first refusal
and option to acquire all of the assets of the entity
at the then fair value of the assets.
(13) the Operating Agreement shall provide that
in the event a member seeks to transfer or divest its
ownership interest in the entity, the state shall have
a right of first refusal and option to acquire the
member's ownership interest at the then fair value of
the interest.
(14) the Operating Agreement shall provide that
in the event that the entity seeks to transfer or
divest any or all of the project assets, the state
shall have a right of first refusal and option to
acquire such project assets at the then fair value of
such project assets.
(15) the Operating Agreement shall include a
right of first refusal and option by which the state
may acquire all or any part of the project assets in
the event that Federal Energy Regulatory Commission of
the United States Department of Energy, the United
States Department of Justice, the Federal Trade
Commission, or other applicable federal or state
agency or adjudicatory body orders one or more
qualified sponsor or the qualified sponsor group, or
their affiliates, to divest any or all ownership
interest in the project, at the then fair value of
such project assets.
(16) the Operating Agreement shall provide that
the project entity shall utilize project financing
supported by federal guarantee instruments as defined
in the Alaska Natural Gas Pipeline Act to the maximum
extent available from the Federal Treasury, and shall
limit the equity portion of project capitalization to
no more than 20% of total capital.
For purposes of this section (a), the term "fair
value" means the value as agreed to by the affected
members or as determined under the dispute resolution
process if no agreement can be reached, provided fair
value shall be determined based on original cost less
depreciation, comparable sales or income approach
valuation methodologies.
CO-CHAIR SAMUELS objected.
CO-CHAIR RAMRAS explained that Conceptual Amendment 10 was
"directly lifted from the memorandum" written by Phillip C.
Gildan of the [consulting firm] of Greenberg Traurig, LLP. He
mentioned that he has shared with others his belief that there
are too many ambiguities in the contract and with regard to some
of the as yet unformed entities such as the ANGPC or any of the
[wholly owned subsidiary entities ("Ancillary LLCs") that would
be formed for the purpose of owning, financing, or operating
portions of the project]. Furthermore, the ANGPC legislation
proposes that the ANGPC shall be incorporated under Delaware LLC
law, and he opined that it would be helpful to use Alaska's LLC
law, given the adoption of Amendment 1, as amended, and the fact
that it will be Alaska's Department of Law that defends the
state.
4:56:08 PM
CO-CHAIR RAMRAS relayed that Conceptual Amendment 10 proposes to
add a new AS 43.82.437, and that paragraph (1) will require any
entity organized to do business in the state of Alaska to be a
limited liability company (LLC) established under Alaska's LLC
law. This provision, he opined, will reduce ambiguities and
give the administration firm guidance.
CO-CHAIR SAMUELS questioned whether incorporating under Alaska's
LLC laws could result in higher costs and tariffs.
CO-CHAIR RAMRAS acknowledged that concern. He went on to
explain that paragraph (2) requires that any entities organized
under Alaska's LLC laws shall include the limitation that the
state's obligation to fund continuing capital and operating
obligations shall be subject to annual appropriation by the
legislature, and provides that the state's failure to
appropriate such an obligation shall not be deemed a default of
the state's obligation but shall instead only be deemed to
reduce the state's ownership interest on a pro rata basis based
upon the amount of the failed appropriation relative to the
amount of the capital or operating obligations funded by the
remaining project owners. He suggested that this provision will
address the issue of possible cost overruns.
CO-CHAIR RAMRAS offered that [Conceptual Amendment 10] is meant
to strengthen the states position, increase the state's accrued
rights, and bring in groups such as Anadarko Petroleum
Corporation, "Shell, Chevron," and "some of the other small
players." Under paragraph (2), he posited, should the project
cost more than is currently anticipated, the state will have the
right to simply reduce its pro rata share of ownership without
finding itself in default. In response to a question, he said
he does not know what effect this provision will have on tariff
rates.
CO-CHAIR SAMUELS suggested that HB 2003 would be the better
vehicle for Conceptual Amendment 10 because that bill
specifically addresses the issues of the ANGPC and Ancillary
LLCs, and ownership interest in the project. He characterized
Conceptual Amendment 10 as far too complex to be considered in
the discussion of HB 2004.
5:03:49 PM
CO-CHAIR RAMRAS disagreed, and pointed out that many of the
provisions of Conceptual Amendment 10 are relevant and specific
to HB 2004. He acknowledged, however, that members may care to
offer amendments to Conceptual Amendment 10 to strike particular
paragraphs if it is felt that those paragraphs aren't relevant.
He then referred to paragraph (3), and explained that it in part
limits the waiver of sovereign immunity. He acknowledged,
however, that he doesn't yet understand paragraphs (3) and (4)
well, since he'd only just received this language yesterday; one
solution would be to allow more time to research the points
raised by Conceptual Amendment 10, though he himself supports
moving the bill along as soon as possible.
REPRESENTATIVE LeDOUX observed that the first portion of
paragraph (3) is similar to Amendment 5, as amended, which
failed to be adopted, and so a similar discussion would be
applicable.
CO-CHAIR RAMRAS indicated that he would be amenable to an
amendment to delete paragraph (3), and perhaps paragraph (4) as
well, from Conceptual Amendment 10. Referring to paragraph (5),
he explained that it stipulates that any operating agreement of
the aforementioned entities shall provide that the managing
members and member representatives owe a duty to act in the best
interest of the entity and perform their duties in good faith
towards the goal of implementation of the project. One of the
concerns expressed in the aforementioned memorandum from which
the language of Conceptual Amendment 10 was derived is that the
interests of the state's partners in the Mainline LLC may not be
the same as the interests of the state.
CO-CHAIR RAMRAS explained that paragraph (6) stipulates that any
operating agreement shall provide that the entity shall not
effect a material change or amendment to the "Qualified Project
Plan" without legislative review and authorization; this
provision empowers the legislature to participate in proposed
changes once a qualified project plan is "on the table." He
mentioned that paragraph (7) stipulates that any operating
agreement shall provide that the members of any Ancillary LLCs
organized by an entity shall be members of the governing body of
that entity unless otherwise authorized by the legislature. In
response to a question, he acknowledged that he does not know
how current law addresses that issue.
5:08:26 PM
CO-CHAIR RAMRAS relayed that paragraph (8) stipulates that any
operating agreement shall provide the state the unilateral right
to initiate expansions of the project, provided the state funds
or obtains third party funding from a credit worthy customer,
and shall include terms for voluntary expansion regarding the
issues outlined in subparagraphs (A)-(D). He spoke of the speed
with which HB 2004 is moving, and expressed a preference for
providing the administration with as many tools as possible,
even if such tools are later abandoned as being unnecessary. He
noted that one of the problems facing those in the Cook Inlet
area is that "the gas in the pipe is full until the year 2012,"
and yet the contracts are in place to maintain a full pipe, so
there is no opportunity for expansion and thus little incentive
to find additional gas at this time.
CO-CHAIR RAMRAS indicated that paragraph (8) is precisely the
protection the state should offer all of the smaller companies;
paragraph (8) will require that the state look at the issue of
expanding pipe capacity even if the engineering doesn't warrant
it. He then read subparagraphs (C) and (D) as proposed via
Conceptual Amendment 10, and relayed that subparagraph (D)
addresses the cost of the tariff. He again said that
[Conceptual Amendment 10] focuses on what's best for the state,
what's best for exploration, and what's best for incentivizing
more discoveries.
CO-CHAIR RAMRAS explained that paragraph (9) stipulates that any
operating agreement shall provide that contracted vendors be
independent and not an affiliate of members of the entity; this
provision will protect the state from its position of only
owning 20 percent interest in the Mainline LLC - in other words,
being a minority member of the Mainline LLC. In response to a
question, he offered his understanding that in owning the TAPS,
the producers have abused the state with regard to revenue that
could have gone to the state, and said that Conceptual
Amendment 10 does not address the state's ability, as a minority
member, to exercise veto power. Paragraph (9), as well as [the
rest of] Conceptual Amendment 10, he remarked, is designed to
help protect the state as a minority member of the Mainline LLC
and Ancillary LLCs.
REPRESENTATIVE LeDOUX said that even if the provisions of
Conceptual Amendment 10 are really good ideas, she is concerned
with the seeming lack of understanding of those provisions.
5:15:56 PM
CO-CHAIR SAMUELS said he agrees with some of the provisions, but
doesn't know enough about most of the provisions to vote on them
as a whole. For example, paragraph (16) speaks to the issue of
federal loan guarantees, but the federal rules have not been
promulgated yet, and so it's not yet known whether the parties
will want to use them. He again noted that HB 2003 will
specifically address the issues raised by Conceptual
Amendment 10.
CO-CHAIR RAMRAS suggested that they simply delete the paragraphs
of Conceptual Amendment 10 that members have concerns with and
hold HB 2004 over for a day so that representatives from the
consulting firm of Greenberg Traurig, LLP, can provide
additional testimony. He again offered his belief that the
provisions of Conceptual Amendment 10 are relevant to HB 2004.
REPRESENTATIVE CRAWFORD expressed favor with paragraph (8),
characterizing it as fundamental to the goal of getting Alaska's
gas to market. He indicated a preference for addressing
Conceptual Amendment 10 in relation to HB 2004.
REPRESENTATIVE SEATON opined that HB 2003 does not go into as
much detail as Conceptual Amendment 10, and also expressed a
preference for addressing it in relation to HB 2004,
particularly given that HB 2004 already addresses the issue of
collateral agreements. He also expressed a preference for
having the legislature authorize collateral agreements.
The committee took an at-ease from 5:20 p.m. to 5:29 p.m.
5:29:34 PM
CO-CHAIR RAMRAS made a motion to delete paragraphs (3) and (4)
from Conceptual Amendment 10. There being no objection,
Conceptual Amendment 10 was amended.
CO-CHAIR RAMRAS explained that paragraph (11) stipulates that
any operating agreement shall provide that the state member
shall have the right to review all books, records, and contracts
of the entity, and to audit the finances of the entity at any
time. Paragraph (12), he relayed, stipulates that any operating
agreement shall provide that the state has the right of first
refusal and option to acquire all assets of the entity upon
termination, liquidation, or dissolution of that entity. He
remarked: "We have heard at length ... that once the
construction-risk period is over, that the producers may not
elect to hold on to a FERC-regulated 12 or 13 percent return
that doesn't rise to the return requirement.
CO-CHAIR RAMRAS explained that paragraph (13) stipulates that
any operating agreement shall provide similar terms with regard
to any owner member that wishes to transfer or divest its
ownership interest in the entity. He mentioned that the term,
"fair value" as referred to in paragraphs (12), (13), and (14)
is defined at the end of Conceptual Amendment 10. Paragraph
(14), he relayed, stipulates that any operating agreement shall
provide similar terms with regard to any owner member that
wishes to transfer or divest its project assets. Paragraph (15)
stipulates that any operating agreement shall provide similar
terms with regard to any owner member that is ordered - by the
FERC, the U.S. Department of Justice, the Federal Trade
Commission (FTC), or other applicable federal or state agency or
adjudicatory body - to transfer or divest its project assets;
paragraph (15) addresses antitrust issues.
CO-CHAIR RAMRAS posited that anti-trust issues at the wellhead
could result in the project being delayed, adding, "We don't
want to build a pipe that only allows for producer gas to go
through it"; the whole notion behind the PPT [legislation] and
building the gas pipeline is to "get more folks up there
developing, investing, and exploring for gas." He explained
that paragraph (16) stipulates that any operating agreement
shall provide that the project entity shall utilize project
financing supported by federal guarantee instruments to the
maximum extent available from the U.S. Department of the
Treasury, and shall limit the equity portion of project
capitalization to no more than 20 percent of total capital.
Regardless that this provision may make the project cost more,
he concluded, he is more comfortable with including this
language than he would be with leaving it out. He then read
Conceptual Amendment 10's definition of the term, "fair value",
and characterized it as a pretty standard [definition].
CO-CHAIR SAMUELS offered his understanding that the House
Judiciary Standing Committee has addressed "a number of these
subjects" via HB 2003.
A roll call vote was taken. Representatives Gatto, Seaton,
Crawford, Kapsner, and Ramras voted in favor of Conceptual
Amendment 10, as amended. Representatives Elkins, LeDoux,
Olson, and Samuels voted against it. Therefore, Conceptual
Amendment 10, as amended, was adopted by a vote of 5-4.
5:35:06 PM
CO-CHAIR RAMRAS moved to report HB 2004, as amended, out of
committee with individual recommendations and the accompanying
fiscal notes. There being no objection, CSHB 2004(RES) was
reported from the House Resources Standing Committee.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 5:36 p.m.
| Document Name | Date/Time | Subjects |
|---|